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New
Political Regime with the Old LC Law Structure
The last decade in the Yugoslavian history has been
characterized by historic changes that have forever affected the life of
people, its economy, political and social structure. Even though the
federation of Yugoslavian states does not exist anymore, this note will
refer to the “LC law of Yugoslavia”, because the LC law that was once
applied in the unified country has been adopted by the states, which have
emerged from the former socialist empire.
The
Break-up of the Empire
The Federal People’s Republic of Yugoslavia was established
in 1946, following the conclusion of World War II. Until its demise in 1991,
the Socialist Federative Republic of Yugoslavia was a federation that was
formed by six member-states (Bosnia-Herzegovina, Croatia, Macedonia,
Montenegro, Serbia, and Slovenia) and two autonomous provinces (Kosovo and
Vojvodina).[i]
The first two members that broke away from the union were Slovenia and
Croatia. Both of them issued proclamations of independence in June 1991.[ii]
The two states were soon thereafter followed by Bosnia-Herzegovina and
Macedonia in the fall of 1991. Eventually, only two states (Serbia and
Montenegro) remained in the original federation.
The edgy situation was further
exacerbated by the collapse of the communist regimes,
hyperinflation, high
unemployment
and ethnic-religious tensions among the former member states. Moreover, the
declarations of independence made by Croatia and Slovenia resulted in armed
conflict with the Serbians, who for years had been trying to resist the
republics’ efforts to establish a confederation of equal and independent
republics. The bloody war officially ended by the Dayton Peace Accord in
1995. Finally, Yugoslavia as we knew it two decades ago was dismantled in
May 2006, when Montenegro in a referendum voted for the separation from
Serbia. Ironically, the 2006 Soccer World Cup will be their last joint
venture.
Negative
effects on banking
During this period of
time, the banking system of Yugoslavia has been seriously damaged by lending
to state-controlled companies and merchants that had close ties to the
Milosevic government.[iii]
As a result of that, the local authorities have been recently faced with a
challenging task to revitalize this sector of economy. Currently,
two
regulatory and statutory regimes exist in the banking sectors of Yugoslavia.
One for Serbia that is incorporated in the Law on Banks and the other for
Montenegro in its Banking Law[iv]
Both entities supervise 39 commercial banks (down from 88 in early 2001) in
Serbia and 13 in Montenegro.[v]
Most of these banks are also authorized to conduct international banking
operations. The World Bank’s reports indicate that
“foreign banks already control about 50% of total banking assets, reflecting
growing investor confidence in the banking system.”[vi]
This is a positive sign that the revitalization process is on the right
track.
The Yugoslavian
banks also participate in various trade-finance programs supported by the
European Bank for Reconstruction and Development. These programs have been
designed to provide financial assistance in the road, rail and civil
aviation sectors as well as to secure municipal loans for local cities like
Belgrade and Podgorica.[vii]
The
classification of letters of credit within the category of contracts
Interestingly, Yugoslavia in the 1960’s became the first
country from the Socialist block to enact legislation permitting foreign
investment.[viii]
Its domestic laws gave enterprises the right to
contract freely with other parties as they wished, provided that the
subject-matter of the contracts was kept within the requirements set out by
the communist party in economic plans.[ix]
The Yugoslavian law of documentary credits is a part of the Law on
Contracts. The same law is also applicable in the former states that formed
the federation of Yugoslavia before its demise in the early nineties.[x]
Some LC lawyers and
practitioners may be outraged when they find independent undertakings being
regulated among other contractual arrangements. It has been reiterated
numerous times that the law of contracts should not apply to documentary
credits, which belong to the category of mercantile specialties.[xi]
The critics argue that the application of contract law principles would
significantly disturb the certainty, finality and liquidity that independent
undertakings provide.
Generally, the countries
in Eastern and Southern Europe classify letters of credit as contracts and
regulate them as such either in specific contract laws (e.g. Yugoslavia) or
in the commercial codes (e.g. Slovakia). Accordingly, unlike in the United
States, the principles of contract law may be stretched to cover letters of
credit in these regions. However, letters of credit are rarely issued
subject to these rules as they insufficiently regulate this area of law and
practice.
The national rules,
including Yugoslavia in § 1074 of its Contract Law, recognize independence
of credits from underlying transactions as the cornerstone principle and
accentuate the abstract nature of undertaking of the bank without a
reference to contract rules. To this end, § 1075 of the Yugoslavian law
defines the letter of credit as “an undertaking of the bank to pay the
credit’s addressee a certain amount of money” Similarly to the Hungarian law,
discussed in a previous posting at LCVIEWS,[xii]
the Yugoslavian law seems to be limited to credits that provide for payment
at sight. Undertakings that call for presentation of drafts as well as
deferred payment credits are not expressly regulated in the law.
Analogically to the Hungarian law, interested parties should refer to UCP
and structure their arrangements in accordance therewith.
Independence or dependence
The issuing bank’s
undertaking to perform is conditioned upon the beneficiary’s compliance with
the conditions included in the credit and the presentation of complying
documents.[xiii]
However, the standard of compliance prescribed by the law is rather puzzling.
The law in § 1080 specifically provides that “the bank is obligated to
examine whether the documents fully comply with the applicant’s demand
(emphasis added)”. This rule obviously encroaches upon the principle of
independence. The banks should not in any case be obligated to determine
whether the presented documents comply with the applicant’s requirements and
preferences. Such a standard is entirely in conflict with the UCP standard
for examination of documents that directs the banks to ascertain whether the
documents comply with the terms and conditions of the credit (emphasis
added).[xiv]
Even though the Yugoslavian law promotes the principle of independence, this
provision seems to undermine its logic
Another perplexing rule
has been incorporated in § 1078(2). According to this provision, “the bank
must within the shortest possible time after receipt of the documents inform
the applicant about their receipt and any irregularities and insufficiencies.”
First of all, the law does not specify what the “shortest possible time” is.
Vagueness of this provision may lead to subjective interpretations and
uncertainty. Quasi-objective standard incorporated in Art. 13(b) UCP 500
much better reflects the banking practice and promotes the finality of
commercial promises. The other equally troublesome issue, found in §
1078(2), relates to the bank’s duty to inform the applicant about the
irregularities in the documents. This is another weakness of the
independence principle that is incorporated in the Yugoslavian law. Such a
duty should not be imposed on banks, because their obligations from the
presentation of documents with respect to discrepancies are running towards
the beneficiary. It is the beneficiary who must be informed as to the
discrepancies; otherwise he looses the opportunity to cure irregularities.
These two rules clearly indicate that the Yugoslavian letter of credit may
be a tool to hinder payments and clog the flow of liquidity in financial
markets.
Presumption
of revocability
With respect to
revocability/irrevocability of letters of credit, the Yugoslavian law
significantly departs from UCP 500 and the draft of UCP 600. Whereas the
former is built on the presumption of revocability, standard international
practices deem credits to be irrevocable. Furthermore, UCP 600 disposes with
the UCP 500 presumption and treats all credits as irrevocable. Yugoslavian
law specifically provides that credits are always revocable unless otherwise
stipulated by the parties.[xv]
As a result of that, the bank is entitled to amend and revoke the credit
upon the instructions from the applicant, or on its own initiative,
according to § 1078. The presumption of revocability under the Yugoslavian
law raises an important issue that foreign exporters must be aware of.
Accordingly, they should only accept credits that incorporate the bank’s
irrevocable undertaking or resort to UCP, which is based on a different
presumption. Similarly to the UCP, § 1079 of the Yugoslavian law provides
that “irrevocable credits may be cancelled or amended only by agreement of
all involved parties.”
Conclusion
The Yugoslavian LC law has
serious flaws and sets dangerous traps for unwary merchants. A number of
them have been examined in the previous paragraphs. Therefore,
prudent credit-users should not resort
to the Yugoslavian law and instead ask for credits issued subject to UCP
or some other set of rules that provides for solid, definite and irrevocable
promises to honor complying presentations.
REFERENCES
[i] Petar Teofilovic,
Crisis in Yugoslav Public Law, 6 Ann. Surv. Int’l & Comp. L. 71, 72 (2000).
[ii] The United
Nations admitted Slovenia and Croatia as new members on May 22, 1992.
[iii] See
http://www.usaid.org.yu
[iv] See
http://www.buyusa.gov/yugoslavia/en/72.html
[v] See
http://www.nbs.yu/english/banks/index.htm and
http://www.cb-cg.org/indexE.htm
[vi] See
www.worldbank.org.yu
[vii] See
www.ebrd.org
[viii] The Law on
Investment of Resources of Foreign Persons in Domestic Organizations of
Associated Labor, July 10, 1967.
[ix] Matthew M. Getter,
Yugoslavia and the European Economic Community: Is a Merger Feasible?, 11 U.
Pa. J. Int’l Bus. L. 789 (1990).
[x] Rolf A. Schutze &
Gabriele Fontane, Documentary Credit Law throughout the World, p. 136
(2001).
[xi] See Barnes &
Byrne, Letters of Credit: 1996 Cases, 52 Bus. Law. 1547, 1548 (1997).
[xii] See
www.lcviews.com .
[xiii] Yugoslavian
Contract Law, at §§ 1072, 1075.
[xiv] UCP 500, at
Art. 13(a).
[xv] Yugoslavian
Contract Law, at §§ 1077.
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