Disregarding non-documentary conditions in letters of credit: Is it as easy as appears to be?

This paper discusses how to treat the problematic existence of a non-documentary condition within a letter of credit that does not specify a required document to evidence its compliance. While the current Uniform Customs and Practices for Documentary Credits (UCP) simply direct banks to disregard such non-documentary conditions in the process of document examination, neither consistent interpretation has been provided to this rule, nor a precise scope of non-documentary conditions given for the past two decades. Through analysing judicial applications of the UCP disregard rule under the common law system, this paper submits that the UCP disregard rule does not achieve its desired effect to eradicate non-documentary conditions. It is further argued that the disregard approach frustrates the commercial parties’ expectations and does not work as an effective method to resolve the non-documentary problem for banks. An alternative is submitted for consideration herein, based on the “evidence” approach adopted by English common law which effectively turns the non-documentary condition into documentary proof, such that it can meet the commercial expectations of all parties while keeping the independent feature of letters of credit intact.