Current Legal Issues Affecting Central Banks, Volume III.
Chapter

Chapter 19 Salient Features of the UNCITRAL Bills and Notes Convention

Author(s):
Robert Effros
Published Date:
August 1995
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Author(s)
GEROLD HERRMANN

The UN Convention on International Bills of Exchange and International Promissory Notes is the culmination of more than 15 years of work by the UN Commission on International Trade Law (UNCITRAL).1 It was adopted by the General Assembly of the United Nations under the recommendation of the Sixth (Legal) Committee on December 9, 1988.2

The Convention has been signed by Canada, the Russian Federation, and the United States, and acceded to by Guinea.3 It will enter into force “on the first day of the month, following the expiration of twelve months after the date of deposit of the tenth instrument of ratification, acceptance, approval or accession.”4

Scope of Application and Form of the Instrument

The Convention applies only to international bills of exchange and international promissory notes when they comply with certain requisites of form. In particular, the Convention applies only to international instruments that bear, in both their heading and their text, the words “international bill of exchange (UNCITRAL Convention)” or “international promissory note (UNCITRAL Convention).”5 The use of an instrument governed by the Convention is thus entirely optional.

The Convention provides its own definition of the terms “bill of exchange” and “promissory note” and explicitly states the conditions in which a bill of exchange or promissory note will be considered to be international.6 According to the Convention, “a bill of exchange is a written instrument which: (a) contains an unconditional order whereby the drawer directs the drawee to pay a definite sum of money to the payee or to his order; (b) is payable on demand or at a definite time; (c) is dated; and (d) is signed by the drawer.”7” A promissory note is a written instrument which: (a) contains an unconditional promise whereby the maker undertakes to pay a definite sum of money to the payee or to his order; (b) is payable on demand or at a definite time; (c) is dated; (d) is signed by the maker.”8 In order to qualify as an international bill of exchange under the Convention, a bill of exchange must specify at least two of the places listed in Article 2(1) of the Convention and indicate that any two so specified are situated in different states.9 The places listed are the place where the bill is drawn, the place indicated next to the signature of the drawer, the place indicated next to the name of the drawee, the place indicated next to the name of the payee, and the place of payment.10 In turn, an international promissory note must specify at least two of the places listed in Article 2(2) of the Convention and must also indicate that any two so specified are situated in different states.11 The places listed are the place where the note is made, the place indicated next to the signature of the maker, the place indicated next to the name of the payee, and the place of payment.12

There is one last requirement that an instrument fulfilling the above criteria must meet in order to qualify as an international instrument under the Convention. In the case of a bill of exchange, either the place of drawing or the place of payment must be situated in a state that is a party to the Convention and must be specified.13 In the case of a promissory note, the place of payment must be in a party state and be specified.14 However, a state may declare, in becoming a party to the Convention, “that its courts will apply the Convention only if both the place indicated in the instrument where the bill is drawn, or the note is made, and the place of payment indicated in the instrument, are situated in Contracting States.”15 This is the only reservation permitted under the Convention.16

The legal rules provided by the Convention will apply even where there has been an incorrect or false statement with respect to a place indicated in an instrument.17 This rule continues the common policy of domestic bills of exchange to the effect that instruments are to be judged only by their texts—that is to say, the information appearing on their faces. It may also be justified on the pragmatic ground that to have otherwise provided could cast doubts on the applicability of the rules and eventually impair the free circulation of international bills and notes. The Convention leaves to domestic laws the question of sanctions that may be imposed where such a false or incorrect statement has been made in an instrument.18

Following the rule established by some domestic legal systems, the Convention does not allow negotiable instruments to be issued payable to bearer. However, nothing prevents a payee or special endorsee from making an instrument covered by the Convention payable to bearer by endorsing it in blank.19

The UN Convention on International Bills of Exchange and International Promissory Notes does not address international checks.20 These had been the subject of a parallel project by UNCITRAL, intended to culminate in a convention. The decision to draw up the uniform rules on international bills of exchange and international promissory notes, and the uniform rules on international checks, as separate legal texts and not as a consolidated text was taken mainly to accommodate the civil law jurisdictions that have traditionally considered bills of exchange and checks as separate instruments fulfilling separate functions. Work on the draft Convention on International Checks was suspended in 1984, partly due to the fact that checks were seen to play a less important role in international payments.

Interpretation of the Convention

An international body of rules aimed at unifying a certain field of law can fulfill its ultimate purpose only if it is interpreted in a sensible and consistent manner by all legal systems applying it. Similar to many other international legal texts, the Convention requires the courts interpreting it to have regard for its international character and for the “need to promote uniformity in its application and the observance of good faith in international transactions.”21

Concepts of “Holder” and “Protected Holder”

In its desire to win commercial acceptance and free circulation of its instruments in international commerce, the Convention firmly upholds the principle of negotiability.

When dealing with the rights of the holder of an instrument and the limitations of those rights by the claims and defenses of others, the drafters of the Convention were obliged to choose between the radically distinct, and yet justifiable, approaches of the civil and common law systems. The solution was a pragmatic two-tier system that distinguishes between a holder for value and a holder in due course.22 The rights of the protected holder are freed from the claims and defenses of other persons to a greater extent than are the rights vested in the ordinary holder.23

The solution, although similar in technique to the scheme found in common law jurisdictions, is a compromise since it borrows from both the civil and common law approaches. For instance, under the Convention,

[a] person is not prevented from being a holder by the fact that the instrument was obtained by him or any previous holder under circumstances, including incapacity or fraud, duress or mistake of any kind, that would give rise to a claim to, or a defense against liability on, the instrument.24

On this issue, the regime resembles the civil law much more than the common law. Perhaps most important, a person who is “the payee in possession of the instrument” or “in possession of an instrument which has been endorsed to him, or on which the last endorsement is in blank, and on which there appears an uninterrupted series of endorsements” can be awarded the holder status, even though any endorsement appearing on the instrument was forged or signed by an agent without authority.25

The Convention enlarged the protection of the protected holder by omitting any requirement that he or she give value for an instrument. Furthermore, the test that one must meet to attain the protected holder status is easily passed, and every holder is presumed to be a protected holder unless the contrary is proved.26

Although not so well protected as a protected holder, a mere holder is not totally unprotected from adverse claims and defenses. He or she, in fact, derives an appreciable degree of protection from the rules contained in the Convention, which allow certain types of claims or defenses only if the holder had knowledge of them or was involved in a fraud or theft concerning the instrument.27

Under the Convention, “[t]he transfer of an instrument by a protected holder vests in any subsequent holder the rights to and on the instrument which the protected holder had.”28 The so-called shelter rule again favors the negotiability of instruments. Its main value is to the protected holder as transferor, since it preserves the value the protected holder invested in taking the instrument in the first place. It is not possible, however, for a holder who is not entitled to any protection to simply “wash” an instrument by transferring it to a protected holder and then taking it back.29

Transfer Warranties

Article 45 of the Convention brings light to an area that is dealt with in different ways in the existing principal legal systems. Moreover, it brings into the realm of negotiable instruments law a principle that is left to the general law of sales or contracts in civil law jurisdictions.

The rule provides that, unless otherwise agreed, a person who transfers an instrument, by endorsement and delivery or by mere delivery, makes certain implied representations concerning the quality of the instrument and his or her lack of knowledge of any fact that could impair the right of the transferee to payment of the instrument against the primary obligator upon it.30 These representations as to quality consist of a warranty that the instrument does not bear any forged or unauthorized signature and has not been materially altered. Liability of the transferor under the article is incurred only if the “transferee took the instrument without knowledge of the matter giving rise to such liability.”31

The liability provided for here is, in part, weaker and, in part, stronger than the one incurred by an endorser. It is weaker in that it does not guarantee payment of the instrument and is available only for the benefit of his or her immediate transferee. It is stronger in that a transferee may recover, even before maturity, the amount paid to the transferor, independently of any presentment, dishonor, or protest.

Guarantees and Avals

The provisions of the Convention dealing with the liability of the guarantor constitute one of the most attractive features of the text.32 The Convention recognizes both the aval, or the Geneva type of guarantee, and the other (arguably weaker) type of guarantee known in common law jurisdictions.33

Article 46 of the Convention provides that payment of an instrument may be guaranteed either before or after acceptance, as to the whole or part of its amount, for the account of a party or the drawee.34 A guarantee may be given by any person who may or may not already be a party.35 “A guarantee is expressed by the words ‘guaranteed,’ ‘aval,’ ‘good as aval,’ or words of similar import, accompanied by the signature of the guarantor,” or “effected by a signature alone on the front of an instrument.”36 In fact, any “signature alone on the front of an instrument, other than that of the maker, the drawer or the drawee, is a guarantee.”37 The words by which a guarantee is expressed determine the nature of the obligation undertaken by the guarantor. In the absence of some notation specifying the party for whom a guarantee is given, the rules of the Convention interpret it as a guarantee for the drawee, acceptor, or maker.38

The crucial difference between the two types of guarantees recognized by the Convention lies ultimately in the defenses that a guarantor may set up against a holder or a protected holder. They differ, depending upon the words used to express the guarantee (“guaranteed” produces a different result than “aval”) and whether the guarantor is a financial institution.39 A guarantor that is a bank or other financial institution and that expresses its guarantee by a signature alone is considered to have contracted the stronger type of guarantee or aval.40 A guarantor that is not a bank or other financial institution and that does the same is considered to have contracted the weaker type of guarantee.41

Other Novel Provisions of Practical Importance

The Convention introduces a number of provisions that ought to be of benefit in modern commercial practice. In this, the Convention reflects its recent development. Many of the negotiable instruments laws of the world have not kept pace with changing business practices. The following are of note.

Instruments with Floating Rates of Interest

The Convention permits instruments to bear interest at a variable rate without loss of negotiability.42 Where the technique used is not in accordance with the requirements of the Convention, the sum payable is deemed to be a definite sum despite the variable rate of interest, and the rate of interest is deemed to be the rate that would be recoverable in legal proceedings in the jurisdiction where the instrument is payable.43 For the protection of debtors, the Convention permits rates to vary only in accordance with provisions stipulated in the instrument and in relation to one or more reference rates published or otherwise publicly available.44 As a further protection, the reference may not be subject, directly or indirectly, to unilateral determination by a person who is named in the instrument at the time the bill is drawn or the note is made, unless the person is named only in the reference rate provisions.45 There may also be stipulated limits to the permissible variations in the interest rate.46

Rates of Exchange Outside Instruments

The Convention also permits reference to a rate of exchange outside an instrument—that is, a bank exchange rate in a particular place at a certain date—in calculating the amount payable under the instrument.47 Here as well, the sum payable under an instrument is deemed to be a definite sum even though the instrument states that it is to be paid according to a rate of exchange indicated in the instrument or to be determined as directed by the instrument.48

Instruments Payable in Installments

The Convention allows instruments that are subject to it to be made payable by installments at successive dates.49 They may also contain an “acceleration clause,” a stipulation that upon default in any installment payment the entire unpaid balance becomes immediately due and payable.50

Instruments Denominated and Payable in a Monetary Unit of Account

The Convention creates a regime in which instruments may be made payable in units of value other than the official currencies of nation states.51 This is accomplished by the definition of the terms “money” and “currency,” which, in addition to referring to normal media of exchange adopted by governments as their official currency, includes “a monetary unit of account which is established by an intergovernmental institution or by agreement between two or more States”:52 for example, the Special Drawing Right of the International Monetary Fund and the European currency unit. The Convention also contains a useful new rule selecting a currency of payment where the monetary unit of account in which an instrument is payable is not transferable between the person liable to pay the instrument and the person receiving the payment.53

Foreign Currency Obligations

The Convention attempts to avoid the controversies that can arise with instruments drawn or made in a currency other than that of the place where payment is to be made. The text provides that, except for cases where the drawer or maker of an instrument has indicated that it must be paid in a specified currency other than the currency in which the sum payable is expressed, payment must be made in the latter currency.54 Where applicable, this rule will prevent a debtor from discharging his or her obligation by payment in another currency, for example, a local one. It should be of assistance by providing greater certainty in cases involving currency fluctuations.

In an effort to avoid infringing on exchange control regulations and other provisions relating to the protection of the currency of a state, the Convention provides a number of modifying rules to apply in exceptional circumstances.55

Signature Not in Handwriting

The Convention attempts to adopt the law to new technology by providing that the word “signature” includes not only a handwritten signature but also a “facsimile or an equivalent authentication effected by another means.”56

Rules on Lost Instruments

New rules are provided concerning lost instruments.57 In particular, a “party from whom payment of a lost instrument is claimed may require the person claiming payment to give security in order to indemnify him for any loss which he may suffer by reason of the subsequent payment of the lost instrument.”58

Short Form of Protest

The Convention relaxes the conventional and highly precise rules on protest that are found in common law jurisdictions. It also provides new common rules for Geneva states lacking regulation concerning the procedures for effecting protest. Under the new regime, “[u]nless an instrument stipulates that protest must be made, protest may be replaced by a declaration written on the instrument and signed and dated by the drawee or the acceptor or the maker, or, in the case of an instrument domiciled with a named person for payment, by that named person; the declaration must be to the effect that acceptance or payment is refused.”59 The Convention also extends to four business days the period that is usually allowed to make protest.60

Uniform Period of Prescription

The Convention provides a single period of prescription or limitation of actions.61 It is set at four years for virtually all actions arising on an instrument under the Convention.62 The only exception is that where a party pays an instrument on which another was primarily liable. The party’s action for reimbursement (recourse) is barred after one year.63

Drawing of Instrument “Without Recourse”

The Convention contains a rule that should facilitate the practice of for-faiting. Under the new rule, the drawer of a bill “may exclude or limit his own liability for acceptance or for payment by an express stipulation in the bill,”64 such as by drawing the bill “without recourse.” This stipulation will be effective “only if another party is or becomes liable on the bill.”65

UNCITRAL Model Law on International Credit Transfers

On May 15, 1992, the UNCITRAL adopted the Model Law on International Credit Transfers.66 The UN General Assembly, during its 47th session, adopted resolutions encouraging states to consider adoption of the Model Law when they revise their laws governing interbank payment by credit transfer.67 That action completed the international phase of the preparation of the Model Law.

Transactions Covered

The Model Law is restricted in its coverage to international credit transfers.68 Credit transfers, referred to as giro transfers or as virement in some countries, are fund transfers in which the sender of funds begins the banking process by instructing its bank to debit its account and to credit the account of the beneficiary of the transfer, or to cause the beneficiary’s account to be credited if the account is held at a different bank.69

The Model Law covers credit transfers without regard to the means by which the payment order is transmitted to the originator’s bank or to how it is transmitted from one bank to the other.70 Therefore, it covers credit transfers made by high-speed wire transfers, exchange of magnetic tapes, or paper-based payment orders, either directly or through an exchange. Nevertheless, during the preparation of the Model Law, special attention was given to the problems that arise in the use of high-speed electronic credit transfers, since an increasing share of international payments is made that way.

Although the Model Law by its terms applies only to international credit transfers, it is expected that many (perhaps most) adopting countries will make it applicable to domestic transfers as well. In that way, they will have a modern law governing credit transfers that is unified with regard to domestic and international transfers and that, at the same time, is uniform with the law of other states.

The expectation that the Model Law will be adopted for use regarding domestic transfers, as well as international transfers, has special implications for transfers by consumers. A footnote to Article 1, which states that the Model Law “does not deal with issues related to the protection of consumers,” requires explanation.71 Since the application of the Model Law does not depend on the purpose of the transfer, it applies equally to transfers made for commercial, financial, or consumer purposes. What is meant by the footnote is that the Model Law does not have any provisions that are especially designed for the protection of consumers as a class. However, the drafters of the Model Law were careful to balance the rights and obligations of banks and their customers, so that special protection for consumers, as a class of bank customers distinct from commercial customers, is of less importance. Nevertheless, the Model Law would be subject to any consumer protection legislation that might be adopted by a state with regard to credit transfers. The footnote was intended to indicate that fact.

Obligations of Sender

A sender is bound by the payment order he or she has sent or that has been sent by an authorized person.72 The Model Law does not attempt to determine what would constitute such authorization; that is left to the applicable national law. The Model Law does, however, have elaborate provisions on the extent to which a purported sender is bound by an unauthorized payment order that has been properly authenticated.73 While this problem of forged signatures is an old one, and the Model Law does not change traditional rules when the authentication is by the mere comparison of signature, the problem takes on a new dimension when the authentication is in a form to be verified by computer. In such a case, there is no means for the receiving bank to detect whether an authentication that checks out is authorized. The position taken in the Model Law is that it is the responsibility of the receiving bank to provide a form of authentication that is “commercially reasonable.”74 If it does so, the sender is bound by any payment order that has been authenticated by that procedure. A sender that is bound by a payment order must pay the receiving bank for the order. The obligation arises when the receiving bank accepts the order.

Obligation of Receiving Bank

Under the Model Law, a receiving bank has no obligation to execute a payment order unless and until it accepts that order.75 A receiving bank is, however, obligated to notify its sender whenever it cannot execute a payment order because of insufficient data,76 whenever it detects an inconsistency in the expressed amount of money to be transferred,77 and, in the case of the beneficiary’s bank, whenever there is an inconsistency in the designation of the beneficiary.78

The Model Law provides for a receiving bank other than the beneficiary’s bank to accept a payment order “when it issues a payment order intended to carry out the payment order received. . . .”79 In addition, such a receiving bank accepts a payment order (i) upon receipt if the sender and the bank have agreed that the bank will execute the payment order from the sender upon receipt (intended specifically to cover the CHAPS system in London),80 (ii) when the bank gives notice to the sender of acceptance (especially in the context of a future execution date)81 or debits an account of the sender with the bank as payment for the payment order,82 or (iii) when the time for giving notice of rejection has elapsed without notice having been given.83 “Deemed acceptance” is the sanction for failing to give a required notice of rejection.84 Acceptance by the beneficiary’s bank is governed by provisions in the Model Law similar to those governing other receiving banks, but specifically geared to the situation of a beneficiary’s bank.85

The obligation of a receiving bank other than the beneficiary’s bank is to send a payment order intended to carry out the payment order received and accepted by the bank.86 In principle, a payment order is to be executed on the day received, otherwise it must be executed on the banking day after the order is received.87 However, a payment order may specify a later date.88 When executing a payment order by sending its own payment order to the beneficiary’s bank or to an intermediary bank, the receiving bank becomes a “sender” and is subject to the rules governing senders.89

Completion of Credit Transfer

The Model Law provides that the transfer is completed when the beneficiary’s bank accepts the payment order.90 The beneficiary’s bank becomes obligated to the beneficiary at that time for the amount of the order accepted.91 The beneficiary’s bank is “obligated to place the funds at the disposal of the beneficiary, or otherwise to apply the credit, in accordance with the payment order and the law governing the relationship between the bank and the beneficiary.”92 This reference to the law governing the relationship between the bank and the beneficiary is a recognition that, in general, the drafters of the Model Law endeavored not to interfere with the relationship between the beneficiary and the beneficiary’s bank. It was felt that this was a matter that could not be unified at the present time.

A footnote to the article on completion of the credit transfer contains a provision, which a state might wish to adopt in connection with the Model Law, providing that, if the transfer was for the purpose of discharging an obligation, the obligation is discharged when the beneficiary’s bank accepts the payment order to the same extent the obligation would be discharged if the payment were in cash.93

Consequences of Failed, Erroneous, or Delayed Credit Transfer

The Model Law states that each receiving bank is under a duty to assist the originator (the issuer of the first payment order) in completing the banking procedure of the credit transfer.94 There is no sanction provided in the Model Law for failure to comply with this obligation.

The Model Law contains a “money-back guarantee” whereby the originator is to be repaid by the originator’s bank if the transfer is not completed.95 The obligation stands alone and does not depend on the reason for the noncompletion of the transfer. There are implementing provisions with regard to the right of the originator’s bank to recover the amount from its receiving bank.96

In case of delay in completing the credit transfer, the only form of damages is interest for the period of the delay.97 The amount of the interest is to be passed on to the beneficiary rather than to the originator.98 That is because the originator, having been debited at the time it expected to be debited, has not suffered any direct loss as a result of the delay. However, the beneficiary has not received the funds at the time expected and, therefore, is the party who has suffered from the delay.

In general, the remedy of interest is the only remedy that can be claimed against a receiving bank for its noncompliance with its obligations.99 However, if the “bank has improperly executed, or failed to execute, a payment order (a) with the specific intent to cause loss, or (b) recklessly and with actual knowledge that loss would be likely to result,” the injured party may resort to any remedy that may otherwise be available in the relevant jurisdiction.100

Conflict of Laws

A footnote to the Model Law contains a provision on conflict of laws for states that might wish to adopt it.101 The provision is in a footnote, in part, because some of the drafters believed that a provision on conflict of laws did not belong in a substantive law, in part, because the Permanent Bureau of the Hague Conference on Private International Law had recommended that the Hague Conference prepare a convention on conflict of laws governing credit transfers and, in part, because there was some dissatisfaction with the provision itself. There is general agreement that it would be preferable if a single law could govern all aspects of a credit transfer, from the sending of a payment order by the originator to the moment the beneficiary’s bank makes the funds available to the beneficiary and gives any required notice to the beneficiary. That is the solution suggested by the Permanent Bureau of the Hague Conference, although the Permanent Bureau was not yet at a point to indicate whether the law to be applied should be that of the originator, the originator’s bank, the beneficiary’s bank, or the beneficiary. The UNCITRAL Working Group and the majority of the Commission did not believe that such a solution was feasible, since it would mean the application of a foreign law to (i) either the relationship of the originator with the originator’s bank or (ii) the relationship between the beneficiary and the beneficiary’s bank, as well as any intermediary banks that were in third countries. As a result, the footnoted provision rejects the possibility of extending the law of a single jurisdiction to an entire transfer, except to the extent that the parties have chosen the same law.102 In the absence of such a choice by the parties, the various segments of the transfer would be subject to the law of the receiving bank.103 The hope is that the Model Law will be so widely adopted that most international credit transfers will be subject in their entirety to the same law.

Draft Uniform Law on International Guaranty Letters

The topic of bank guarantees and stand-by letters of credit has been attracting interest for some time. The general approach of UNCITRAL was to monitor and assist the work of the International Chamber of Commerce (ICC), for example, by gathering and analyzing views from the many countries that do not have ICC national committees.

A recent example of that approach was the review by an UNCITRAL Working Group of the ICC Draft Uniform Rules on Demand Guarantees.104 Thereafter, UNCITRAL started its complementary unification effort, which is based on an organizational division of labor.

The need for a uniform law arises from the fact that bank guarantees and stand-bys, while functionally equivalent, are subject to different legal regimes, which call for improvement in different directions. Bank guarantees, as creatures of commercial practice, are scarcely regulated by statute (except in Eastern Europe and the Middle East) and are subject to disparate case law, particularly with regard to the extent of the recognition of their independence from any underlying transaction. In many jurisdictions, the “struggle for independence,” as evidenced by the degree of possible objections to payment, is still going on, causing uncertainty about and reservations against their use.

Stand-by letters of credit are regulated in few provisions of law, although they may be covered by the Uniform Customs and Practice for Documentary Credits.105 While independence is less of a problem under these rules, the applicability and appropriateness of individual provisions is often uncertain, owing to the different nature and purpose of a standby compared with the traditional commercial letter of credit in a documentary sales transaction.106

With a view toward avoiding duplication and inconsistency with the Uniform Customs and Practice for Documentary Credits or other ICC-Uniform Rules, the focus of UNCITRAL’s efforts is on those matters that cannot effectively be tackled by contractual rules.107

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