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Intermediary September 2007
UCP 500 and UCP 600 - an update
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The Uniform Customs and Practice for Documentary Credits (“UCP”) is a standard set of rules which may be incorporated into documentary letters of credit to govern their operation and payment. The rules have been produced and updated a number of times by the International Chamber of Commerce (“ICC”) since they were first promulgated in 1933. The subject is particularly relevant at the moment since the ICC issued their remodelled set of rules – the UCP 600 – on 25 October 2006 and these new rules have been available for incorporation into credits since 1 July 2007. As such, they are not yet fully established, very much under scrutiny and open to critical comment.
This article will consider briefly the factors that instigated the revision and the background to the reworking of the UCP 500, the UCP 600’s predecessor. It will also provide highlights of the more crucial changes and some of the more important ones will be considered in overview below.
It is worth making a few general comments by way of introduction. Looking at the UCP 600, one can find both cosmetic changes to structure of the rules and deeper changes that go to the heart of the role that documentary credits play in international commerce.When considering the various changes, it is important to remember that documentary credits are frequently the payment mechanism of choice when conducting cross-border business.The nature of credits makes them ideal for parties based in different jurisdictions performing contracts in still different countries to where they themselves are based. In many cases, the parties will not have had prior dealings with each other.With the use of documentary credits, commodity traders, those involved in the shipping industry or in any kind of international agency or business can ensure that the payment aspect of their contract runs smoothly provided of course that the correct documents are presented to trigger payment. Reliability in such a payment mechanism is paramount. In considering the revisions to the UCP, it is essential to appreciate the balance which needs to be struck between “strict compliance” on the one hand and the commercial reality of providing a workable, international commercial payment mechanism on the other. Compliance needs to be strict but conversely the credit cannot be subject to such literal or technical scrutiny that it fails as a reliable payment mechanism.
Background
The process of revision started in May 2003.The Banking Commission of the ICC established two working groups to undertake this substantial task: a Drafting Group and a Consulting Group.These groups consulted, in turn, with forty five ICC National Committees globally. Given the importance of standardisation of banking procedure internationally, it was crucial to obtain input from the market which included contributions on banking and letter of credit practices across industries and across jurisdictions.The review process itself was thorough to say the least. It took three years whilst an exhaustive process was undertaken. Almost 600 opinions issued by the Banking Commission, numerous DOCDEX decisions and legal authority, as well as over 5,000 comments from more than 40 ICC national committees worldwide were reviewed with active input from not only bankers and lawyers, but also from key industry sectors including traders, insurers, carriers and various others.
The changes: Clarity and Consistency in Application
A major theme in the revision was to ensure clarity and consistency in approach. This was achieved by means of changes to the overall structure of the rules and more fundamental changes in content of certain key rules. UCP 600 both clarifies how certain pre-existing rules should be interpreted and also adds new conditions and parameters for documentary credit practice. ICC Position Papers and a number of the ICC Banking Decisions will no longer be used to interpret the rules.The restructuring condenses the provisions from 49 to 39 articles and streamlines the procedure and should, in theory at least, leave less room for inconsistent application. It is clear that the rules have been carefully considered both individually and as a whole.There are a number of provisions or amendments to provisions which should aid clear interpretation and consistent application:
- Fuller definitions are provided, including full definitions of “advising” and “confirming” banks, “issuing bank” and also the concept of “honour” vis-à-vis payment (i.e. “honour” means to pay immediately or, alternatively, to pay at maturity having either incurred a deferred payment undertaking or accepted a “draft”/bill of exchange).
- The term “negotiation”, which was previously unclear, has now been defined properly. It means the purchase of drafts or documents under a complying presentation by advancing or agreeing to advance funds to the beneficiary on or before the banking day on which reimbursement is due to the nominated bank.This appears to apply to silent confirmations as well.
- Defining “honour” and “negotiation” should create an improvement in practice since these terms have been the subject of disputes in the past.
- A “banking day” is defined and can be distinguished from a business day since the drafters wanted to exclude days on which a bank would be open for business but not for checking documents presented under credits. Unfortunately, the wording arguably does not achieve this aim since it provides that a “banking day means a day on which a bank is regularly open at the place at which an act subject to these rules is to be performed”.
- An entirely new section containing interpretations aims to ensure clarity and consistency in application of the rules.
- Some of the interpretations are not new. For instance, the requirement to disregard terms such as “prompt”, “immediately” and “as soon as possible” appear under UCP 500 but only towards the end of the rules, like an afterthought. The new interpretations section in UCP 600 is given prominence as the third article under the rules. Here a note of caution is given in relation to calculating time in the context of a shipment period. In particular, the new rules provide that calculation of the number of days “from” a certain date in the context of a shipment period must include the date mentioned.This is not the way most people would approach such a calculation.
- Further quite simple changes provide clarity and remove previous problem areas. For instance, the phrases “without delay” and “reasonable time … which must not exceed seven banking days”, being the period in which banks previous had to accept or reject documents under UCP 500, have now been replaced with a defined period of five days without any qualification.
- Similarly, banks cannot now impose a time limit for rejection of amendments to the credit.This effectively puts a halt on some banks’ previous practice under the UCP 500 of setting down a time limit within which an amendment had to be accepted or rejected and, if the deadline was not complied with by the due date, the amendment would, somewhat unfairly, be deemed accepted.
Standard For Examination Of Documents
The conflict between the doctrine of strict compliance in documentary credit practice and the need to ensure commercial workability was raised in the introduction to this article. One of factors driving the need for revision of the UCP was the high level of rejections of documents on first presentation. Indeed, the introduction to UCP 600 specifically refers to concerns that documentary credits will be undermined as international payment mechanisms if certain issues are left unaddressed. A major concern was banks being able to continue rejecting documents on purely technical grounds when, in fact, there is no real or actual discrepancy.
One key change under UCP 600 which goes to the root of the problem is the fact that documents presented under a credit are now not required to be an exact replica or mirror image of each other. Rather, the data in documents must not be inconsistent or, as set out in Article 14, must “not conflict” with other data.This alters the previous requirement under the UCP 500 that such data had to be consistent.This is sensible in that data in two documents which is not “consistent” might at the same time not actually conflict. It is a matter of degree, and by changing the requirement to a lack of conflict, the drafters have lowered the threshold slightly.
Typographical errors have in the past been a sticky area when it comes to technical as opposed to real discrepancies.There are numerous examples of typographical errors in documents causing problems and particularly common are typing errors in addresses. In this situation, the document checker might not be aware whether he is considering two entirely different addresses or whether the discrepancy is merely a typographical error. Under UCP 600, with the exception of addresses in transport documents, the addresses of the beneficiary and the applicant need not be identical provided that they are in the same country as the addresses provided in the credit. Moreover, contact details such as telex, telephone, fax and the like will be disregarded.This change will go some way towards ensuring that documents presented under a credit cannot be rejected on purely technical grounds. In the same vein, Article 14 requires that non-documentary conditions are disregarded. A non-documentary condition would be a condition in the credit which does not stipulate a corresponding document to indicate compliance with the condition. For instance, a credit may specify that goods are carried on a first class vessel but not require a class certificate to be tendered establishing the vessel’s classification. Similarly, the credit may state that the goods be of a certain origin but not call for presentation of a certificate of origin for those goods.
The aim of these changes is to reduce the number of rejections of documents tendered under documentary credits. It is still early days but the outlook is favourable in that it is easier for a document to be compliant under UCP 600 and there is less room for rejecting documents presented under a credit on purely technical grounds. If this is wrong and the figure of 70% of documents rejected on first presentation is not reduced, there are likely to be further changes by the ICC.
Glencore International V Bank Of China, Kredietbank Nv V Midland Bank & Credit Industriel Et Commercial V China Merchant Bank
What constitutes an original document has also provided fodder for disputes in the past, as is illustrated by the cases of Glencore International v Bank of China, Kredietbank NV v Midland Bank and Credit Industriel et Commercial v China Merchant Bank.The question is whether new article 17 under UCP Glencore and Kredietbank cases and as accepted by the Judge in the China Merchants Bank case?
UCP 500 provided that, unless the credit stated otherwise, banks should accept as “original” all documents which were produced by automated or computerised means and were marked “original” and, where necessary, signed.This meant that any document which was in fact original but not stamped as such could be rejected as not being compliant. Consequently, a Policy Statement was issued by the ICC stating that documents would be presumed originals unless they were “obviously copies”; not a very helpful guide. Now, under UCP 600, a new article re-states the position and incorporates the Policy Statement into the rules themselves.This also reflects current legal authority. However, the article goes further to state that not only is a document to be treated as original if it is stamped or marked as such, but it must also be treated as original if it appears to have an original signature, mark, stamp or label of the document issuer, if it appears to be produced on original stationery, or if it appears to be written, typed, perforated, or stamped by the issuer’s hand (unless the document makes clear that it is merely a copy).The drafters’ intentions may have been sound but this sounds like a recipe for trouble.
Banco Santander
The Banco Santander v Bayfern case, infamous and controversial in the banking community, concerned a dispute between an issuing bank and a confirming bank over a deferred payment credit.The Court of Appeal in England held that a bank entering into a deferred payment arrangement without express authority from the issuing bank to pay earlier than the credit’s maturity date bore the risk of fraud uncovered between the time that it effected (early) payment and the maturity date to the tune of US$18.5 million. Certainly, the decision discouraged some banks from discounting payments before the maturity date. UCP 600’s articles 7(c) and 8(c) attempt to resolve the problem posed by the Banco Santander case. The effect of these new provisions is that nomination of a bank to prepay or purchase an accepted draft or a deferred payment undertaking simultaneously gives the nominated bank authorisation to act. Consequently, the nominated bank will be entitled to reimbursement by the issuing bank even if there is intervening fraud. Thus the risk of such intervening fraud will fall on the applicant and they need to be aware of this. In practice, this may also mean that issuing banks are unwilling to issue deferred payment credits using nominated banks because they themselves will be equally exposed to a loss which might not be recoverable from the applicant.
Conclusion
In conclusion, UCP 600 provides a neater, more comprehensive and more streamlined version of the rules than its predecessor.Various revisions are aimed squarely at improving certainty, clarity and predictability and, in most cases, they ought to achieve this. Notably, the UCP 600 is not intended to be a bank’s document. The aim has been to balance interests rather than produce a document which favours bankers versus applicant and beneficiary.That said, realistically, one would be advised to view the UCP 600 as a bank’s document and tread with caution. Overall, a number of improvements under UCP 600 can be welcomed and there ought to be improvements in practice. However, some of the old problems of UCP 500 may well not have been resolved. Moreover, it must be appreciated that this set of rules is not intended to be a stand alone document. National law in the applicable jurisdiction, the law chosen to govern the credit and local banking practice will inevitably affect uniformity of interpretation or application of the rules. In terms of examination of documents, the various ways in which UCP 600 waters down the requirement for consistency between documents will be helpful in reducing the number of rejections of documents on first presentation and rejection of documents on purely technical grounds. Finally, there is the question of whether the right balance has been struck between strict compliance on the one hand and commercial reality on the other. It is early days for the UCP 600.Whether UCP 600 will succeed where UCP 500 fell short remains to be seen.These rules came into effect less than two months ago and time is needed for the market to get used to applying them, interpreting them, and working with them.
By Jenni Lajzerowicz, Senior Associate, Maritime Trade & Energy Group, Norton Rose LLP, London