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Documentary credits

On February 1 2008, an amendment to Article 71 of the Mexican Credit Institutions Law (Ley de Instituciones de Crédito, CIL) was enacted to clarify the law on documentary credits in Mexico.

The newly reformed Article 71 of the CIL sets forth the law that credit institutions issuing or confirming letters of credit in Mexico shall comply with. The new provisions rank over all usages and practices expressly provided by the parties in each letter of credit; even if the parties agree on certain terms and conditions under which the letter of credit will be issued, confirmed or paid, that agreement does not contravene the provisions of the CIL.

UCP 600, with respect to documentary credits, and ISP 98, with respect to standby letters of credit, have traditionally been the guidelines that commercial banks worldwide have adhered to in the issuance, confirmation, advising and payment of commercial documentary and standby letters of credit. As a matter of Mexican law, parties need to refer to and agree on the terms of UCP600 or ISP98 if they intend to use them to fill gaps in letters of credit issued or confirmed by a Mexican credit institution.

Pursuant to the newly enacted regulation, a letter of credit is an instrument in which a credit institution agrees to pay a certain or determinable amount of money in favour of the beneficiary, against presentation of the relevant documents, provided the terms and conditions of the letter of credit are complied with; the payment may be on demand or within a specified term, on its own account or for the account of its client, directly or through a correspondent bank. Similarly, Article 71 provides that letters of credit may also be standby if the payment obligation is subject to the presentation of a payment request together with the other documents set forth in the letter of credit.

The documentary character of the letter of credit is evidenced in the CIL by clearly spelling out that payment under the letter of credit shall be made against delivery of documents specified in the letter of credit. The autonomous character of the documentary credit regarding the underlying commercial transaction is also made a matter of Mexican law by clearly providing that, once issued, the payment obligation of the issuing bank under the letter of credit is independent from the bank's rights and obligations with respect to the requesting party.

Article 71 of the CIL contains provisions that seek to limit the responsibility of the issuing bank and to enable payment to be made on review of the documents. Credit institutions shall not be responsible for the performance or default of the action or legal act underlying the letter of credit; for the accuracy, authenticity or legal value of documents presented under the letter of credit; for acts or omissions by third parties, even if the third party is appointed by the issuing bank or correspondent banks; for the quality, quantity, weight, value or any other characteristic of the goods or services described in the documents; for delay or loss in means of communication; or for default due to force majeure.

Article 71 of the CIL also sets out a fall back provision regarding jurisdiction by stating that, unless otherwise agreed, disputes arising in connection with letters of credit shall be resolved by the competent courts of the place where such letters of credit are issued. Disputes arising out of the payment obligations derived from confirmation of letters of credit shall be heard by the competent courts of the place where such letters of credit are confirmed. In this regard, it must be noted that the letter of credit shall not be treated as a negotiable instrument (título de crédito) under Mexican law; therefore, the benefit of a summary judgment sought by the beneficiary against the issuing or confirming bank may not be available.

As with any new legal provision, the interpretation of the new Article 71 by the Mexican tribunals will be crucial in determining its effectiveness.

Federico Santacruz and Jorge Oria

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