Payment for paperless trade: Are the viable alternatives to the documentary credit?

In the case of a bank acting as a stakeholder, problems may arise as to the extent of the bank's authority or ability to decide when and how to pay, and the bank's liability in case of wrongful payment. The bank may have to play a role similar to that of the confirming or issuing bank under a documentary credit, namely, receiving the documents, checking for compliance, and, if satisfied, releasing the funds.

Whether banks will assume such a role in the absence of a clear liability regime is doubtful. The UCP,132 which has standardized banking practice relating to documentary credits and regulates virtually all documentary credits,133 specifies the rights and responsibilities of parties under documentary credits.134 The UCP does not readily apply to an escrow account transaction. The rights and obligations of the parties will have to be governed by ordinary principles of contract, making detailed and carefully drafted terms of the transaction necessary.

If banks are to play a stakeholder role under the escrow account system, it is unclear what advantage this system would have over documentary credits. The system seems to complicate unnecessarily the banks' role and parties' interests. As noted above, electronic systems may reduce delays with documentary credits. Furthermore, banks will charge fees for their services as stakeholders.

Further problems will arise in the case of an importer's insolvency. When money has been deposited in an escrow account and the exporter has shipped the goods but not received payment, what

happens if the importer or exporter becomes insolvent? Can the creditors of the insolvent importer or exporter claim the amount? There may be no simple answers to such problems. The answers will depend on the nature of the account and the person in whose name the account is maintained.135

It needs to be noted that the law governing banker and customer relationships is presumed to be that of the country where the account is kept.136 In Australian law, for example, insolvency is regulated by the 1966 Bankruptcy Act. 137 Upon bankruptcy, all property of the insolvent entity, existing or subsequently to be acquired, vests in the official or registered trustee.138 The trustee realizes and distributes the property to the creditors according to applicable priorities.139

What is important then is whether the money in the escrow account has vested or will vest in the importer or exporter, and, therefore, in their trustees in bankruptcy. Whether the amount vests in the trustee in bankruptcy will depend on the nature and terms of the account. Basically, one may say that if the account is in the name of the importer, the amount may vest in the importer until the exporter is paid and the creditors may lay a valid claim on it, unless it is established that the importer held the amount in trust for the exporter. If, on the other hand, the account is in the exporter's name, the deposit may presumably vest in the exporter and be beyond the reach of the importer's creditors, unless it is established that the money is held in trust for other persons, such as the importer. If the account is in the joint names of the parties, or in the name of a third-party stakeholder, difficult legal questions may arise. Ultimately, who owns the amount, and whether creditors of an insolvent importer can claim it, will depend on the particular situation.