UCP 600

Journal of International Banking & Financial Law/2007 Volume 22/Issue 4, April/Articles/UCP 600: not so strict compliance - (2007) 4 JIBFL 196

Journal of International Banking and Financial Law

(2007) 4 JIBFL 196

1 April 2007

UCP 600: not so strict compliance

Feature

UCP 600

Paul Downes

is a barrister specialising in banking and finance at 2 Temple Gardens, Temple, London, EC4Y 9AY. Email: pdownes@2tg.co.uk
© Reed Elsevier (UK) Ltd 2007

This article summarises the main changes to be introduced by the UCP 600, focusing on those areas giving cause for concern.

KEY POINTS

· In the new Uniform Customs and Practice for Documentary Credits ('UCP') 600, documents need not be absolutely consistent or mirror images of each other.

· Reliance on non-documentary conditions is precluded.

· The data content of documents must not be inconsistent.

· Some provisions may give rise to arguments in the future.

On 20 January 2000 the International Chamber of Commerce ('ICC') made a press statement indicating that there would be no revision of the UCP for several years. Gary Collyer (Technical Advisor to the ICC since November 1996) said:

'We need to be able to assess the development of e-commerce and to analyse its potential short -- and long-term implications for trade ... [the Banking Commission] needs to establish a mechanism to supplement the issuance of a new set of rules.'


In fact, without issuing a press release (or at least not one listed on the ICC website), work on a further revision began in May 2003 and it was announced on 25 October 2006 that the revised UCP had been approved by a unanimous vote of 91 to 0. The changes are to come into effect from 1 July 2007.
Nobody could argue that the revision was not thorough. The working party reviewed all ICC opinions (numbering more than 500), the two ICC decisions, the 40-50 DOCDEX cases and all relevant Court decisions since the previous revision. We are told that they found that 58 per cent of all ICC opinions focused on just seven articles in the UCP 500, those being arts 9, 13, 14, 21, 23, 37 and 48.

THE PROBLEMS IN OUTLINE

The main problems identified as being appropriate to address in the revision were:

· The practice on the part of some banks of imposing a time limit for the acceptance or rejection of amendments to a letter of credit; in default of which acceptance was assumed.

· The decision in the case of Banco Santander v Bayfern [2000] Lloyd's Rep (Banking) 165 preventing the assignee of a letter of credit from recovering from the issuing bank where a fraud comes to light after assignment but before the obligation to pay.

· Interpretation of the terms 'without delay' in UCP 500 arts 9(c)(i) and 9(d)(ii) and 'reasonable time' in art 13(b).

· Typographical errors.

· Non-documentary conditions (for example a reference in a letter of credit to goods being of 'Chinese origin'), and letters of credit calling for documents without saying what they must contain.

· Whether documents dated after the date of shipment are discrepant.

· Miscellaneous issues regarding transport documents and transferable credits.

THE CHANGES IN OUTLINE

The main changes are as follows:

· ICC Positions papers 1-4 are stated to have no application to UCP 600.

· A new simplified structure with new definitions and interpretation articles.

· A statement that revocable credits do not fall within UCP 600.

· References to the terms of the underlying contract are expressly discouraged in art 4.

· A change to the outcome of the Banco Santander case in art 8: namely that the issuing bank will be liable where a fraud comes to light after an assignment of a deferred payment obligation.

· A new art 9 dealing with advising credits and amendments.

· Article 10 requires that amendments be the subject of express agreement.

· A new art 12 dealing with the effect of nominating a bank.

· Article 14 does away with the 'reasonable time' for checking documents and replaces it with a blanket five banking days.

· A new art 15 dealing with complying presentations.

· Article 16 regularises the widespread practice of rejecting documents subject to an approach to the applicant for a waiver and if such waiver is received to release the documents without further notice. (This practice had been held to be non-compliant with old art 14 by Mr Justice David Steel in the case of Credit Industriel et Commercial v China Merchants Bank [2002] 2 All ER (Comm) 427.)

· A new art 17 dealing with originals and copies taking up the contents of the ICC policy statement dated 12 July 1999 following the decision in the case of Kredietbank v Midland Bank [1999] Lloyd's Rep (Banking) 219.

· And finally the deletion of old arts 5 (instructions to issue and amend), 6 (revocable credits), 8 (revocation of credits), 12 (incomplete instructions) and 38 (other documents).

Table 1, over the page, summarises the links between the new UCP 600 and the previous equivalent provisions in the old UCP 500.

Table 1











600
OLD 500
600
OLD 500
600
OLD 500
600
OLD 500


1
1
11
11
21
24
31
40


2
New
12
New
22
25
32
41


3
New
13
19
23
27
33
45


4
3
14
13
24
28
34
15


5
4
15
New
25
29
35
16


6
9, 10, 42
16
14
26
31
36
17


7
9, 10
17
New
27
32
37
18


8
9
18
37
28
34, 35, 36
38
48


9
7, 11
19
26
29
43, 44
39
49


10
9
20
23
30
39














NOT SO STRICT COMPLIANCE?

But was there something more that was driving the revision? There is a real fear that an overly technical approach to the test for compliance in the presentation of documents under a letter of credit will undermine the commercial efficacy of these instruments.
Of course, the converse proposition is also true and since Viscount Sumner's warning in the case of Equitable Trust Co v Dawson (1926) 27 Lloyd's Rep 49 at p52 that: 'There is no room for documents which are almost the same, or which will do just as well. Business could not proceed securely on any other lines ...' practitioners have regarded a strict approach to discrepancy issues as underlying the integrity of the credit.
But the new UCP 600 emphasises that documents need not be absolutely consistent or mirror images of each other, merely that they must not be inconsistent. In particular drafting changes have been made to old art 13 (new art 14) to preclude reliance on non-documentary conditions, to water down the requirement of consistency and make clear that documents may be dated at any point up to presentation.
The drafting committee even sought to persuade the banking community to do away with any requirement for a check on the consistency of the data content of documents: this suggestion was, however, rejected.

TOP TEN TRAPS FOR THE UNWARY

So what provisions may give rise to their own difficulties? Below are the provisions that I believe may give rise to arguments in the future, set out in reverse order.

Number 10: a change but still no reference to SWIFT

The old UCP 500 stated at art 1 that it applied only where the UCP 500 was 'incorporated into the text of the credit'. In fact very few letters of credit complied with this but instead reliance was placed on the fact that the letters of credit were communicated under the SWIFT protocol, by the MT700 format. The SWIFT rules provide that where a letter of credit is communicated in this way: UCP 500 applies.
Given that a letter of credit is primarily a contract between the issuing bank and the beneficiary it was a moot point whether this was sufficient. However, nobody had the temerity to argue the point.
We know that the drafting committee specifically considered whether there should be a reference to SWIFT in the new UCP 600 and this was rejected since it was not known whether the SWIFT protocol would survive the next revision. New art 1 uses a slightly different formulation requiring that 'the text of the credit expressly indicates that it is subject to these rules'. Out of an abundance of caution therefore letters of credit issued after July 2007 should include an express reference to UCP 600 if that is what is intended.

Number 9: peculiar definition

The definition of a banking day in the new art 2 is 'a day on which a bank is regularly open at the place at which an act subject to these rules is to be performed'.
Apparently the drafting committee wanted to exclude days on which banks were open for business but were not going to be dealing with checking documents under letters of credit. Thus a bank in the Far East open on a Saturday morning, providing a limited counter service, would not use up one of its 'banking days' for checking documents since its international department would not be working at weekends.
But that is not what the wording says. If that had been the aim the draft should have defined a banking day as 'a day on which a bank is regularly open to perform an act subject to these rules'.
The result is that in the example I have cited if the act to be performed is to be performed in Singapore (where banks are open typically on Saturdays between 9.30am and 1pm) the Saturday will be a banking day since it is a day on which a bank is regularly open at the place at which an act subject to these rules is to be performed.

Number 8: a watering-down of the doctrine of strict compliance

As I have already explained there is real drive for the watering down of the 'consistency' aspect of the test for discrepant documents.
Unless the rate of discrepant presentations reduces to an acceptable level one can expect a further attempt to do away with the consistency test as between the data content of documents.
However, this may easily be addressed by adding a standard requirement to each document to be presented that 'the contents of which are to be consistent with other documents set out in this letter of credit'.

Number 7: a revocable credit cannot be subject to UCP 600

In practice revocable credits are rare. However there are situations where the parties agree that upon the satisfaction of a given contingency a letter of credit may be revoked. In such circumstances issuers should express the letter of credit to be subject to UCP 500. A reference to UCP 600 will create an internal inconsistency in the credit which would not easily be resolved.

Number 6: time limits for rejection will be disregarded

New art 10(f) provides that an issuing bank cannot effect an amendment by stating that the amendment will be deemed agreed unless notice of rejection is received by a particular date. Banks should therefore not rely on the practice of imposing time limits for the rejection of amendments.

Number 5: data content essential

The drafting group in introducing this change to the banking community have been at pains to emphasise that where a letter of credit merely calls for a document without saying what it must provide: the document presented will be acceptable whatever its contents.
Thus where a contract for the supply of frozen chickens is supported by a letter of credit calling for an inspection certificate without more: the condition will be satisfied if an inspection certificate is presented even if it does not 'pass' the chickens: for example stating that they are unfit for human consumption But how far can this example be taken? If the inspection certificate observed that the chickens were no longer 'frozen' would this suffice? Or if it observed that the chickens had nearly thawed? The new draft seeks to reduce discrepancies by taking such consistency issues out of play (see Number 8 above): but in so doing many have observed that common sense might be taking a back seat.

Number 4: non-documentary conditions

On a similar theme UCP 600 has renounced ICC position papers 1-4, which inter alia, dealt with the problem of non-documentary conditions (see position paper 3), providing that in general they would be ignored save where the non-documentary condition 'can be clearly linked to a document stipulated in that documentary credit'. Thus a condition that goods be of Chinese origin in a credit calling for a certificate of origin will be interpreted as a data content requirement for the certificate.
The upshot is that the abandoning of the position papers and the provisions of new art 14(h) requiring banks to disregard all non-documentary conditions may give rise to an increase in consistency arguments. In practice it may be difficult to give no regard whatsoever to all non-documentary conditions where they have a very close connection to a required document. It is not difficult to imagine hard cases coming before the courts (particularly if there is a suggestion of fraud) and judges straining to qualify the absolute prohibition contained in new art 14(h).

Number 3: Deferred payment obligations: applicants beware

There is little secret that the Banco Santander decision was not popular with the banking community. That case concerned a deferred payment obligation of $18.5m and the result was that the bank discounting the letter of credit took the risk of the fraud.
The solution was simple: place the risk of fraud on the issuing bank. The reason: the issuing bank will always be able to recover from the applicant (ie the victim of the fraud). The discounting bank will have no remedy since the fraudster will, presumably, have disappeared.
The string of recent massive frauds involving letters of credit has caused the banking community to sit up and take notice. So from now on an applicant who agrees to a deferred payment obligation who discovers the fraud in the relevant period will effectively be deprived of the defence it would have had under the previous case law.

Number 2: typographical errors

Typographical errors in a letter of credit (which are common) can give rise to difficulties where the documents presented accurately state the address (note this is by far the most common way in which this difficulty arises). A banker checking documents in an obscure jurisdiction may not know whether a town spelt slightly differently is a typographical error or is a reference to a completely different place.
As Lord Justice Evans observed in the Kredietbank case:
'... the distinction between "trivial" discrepancies and those which require the bank to reject the documents tendered (subject to further express instructions from the customer) is not always easy to draw.'


Be that as it may: the ICC have sought to codify one aspect of the problem by providing in new art 14(j) that addresses of the beneficiary and the applicant need not be identical so long as they refer to the same country. The exception being with transport documents subject to new arts 19-25, in which case the contact details for the applicant as the consignee or notify party must correspond to the credit.
As with any change to an admittedly problematic draft, there is the risk that the new wording causes more problems than it solves. Whilst the general clarity may be welcomed, there is still no easy answer to the problem of whether a banker checking documents in London should regard a reference to, for example, 'Turku-Pori, Finland' as equivalent to 'Turku, Finland'. (The answer is in fact that they are two completely different places.)

Number 1: beware the time calculation of days 'from' a date

New art 3 contains some helpful interpretations. Most of these are intuitive. However, when it comes to time calculations the article provides as follows:
'The words "to", "until", "till", "from" and "between" when used to determine a period of shipment include the dates mentioned, and the words "before" and "after" exclude the dates mentioned.'


Most of this is straightforward. However when calculating a period of shipment, for example, stated to be within one day from 1 January, most would say that one day from 1 January would take one to 2 January. However, that is not what is provided: one day from 1 January includes the 1 January: 2 January is too late. Whilst a computation of time stated to be a given number of days from a date may be said to be equivocal, the general rule, as a matter of English common law, is that the calculation will exclude the date in question (see Halsbury's Laws of England 4th Edn Reissue at para 228). The new UCP therefore provides a method for computation in this respect that is counter-intuitive and may give rise to difficulties in practice. The solution is straightforward: insofar as is possible letters of credit should not invite such computations but should instead specify deadlines as dates.

CONCLUSION

Much of what has preceded may seem critical. It is not intended to be. The new revision was inevitable and there is no question that the changed format is easier to find one's way around and many of the changes amount to welcome clarification.
However, as with any revision of this sort, one must keep in mind the object of the authors: this is a banker's document and is intended to suit the bank's agenda.
That is fine for most purposes, but letters of credit are increasingly an instrument used by institutions apart from the banking community as well as private companies. In such situations parties should ask whether the bank's agenda suits the allocation of risk that is appropriate in their particular circumstances.


---- End of Request ----
Print Request: Current Document: 1
Time Of Request: Thursday, December 06, 2007 22:47:38