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A critical discussion of the most recent revision of the UCP, the extent to which it deals with the problem which had arisen in practice and the extent to which it is likely to increase the use of letters of credit as a means of payment in international sales
The ICC Uniform Customs and Practice for Documentary Credits 2007 Revision (UCP) is implemented on July 1, 2007. There are several differences between the UCP 600 and the former 1993 Revision (UCP 500). When analysing from a broad perspective, the UCP 600 is composed of 39 articles, which is less than UCP 500 by 10. In addition, the structural arrangement of the articles is also different, as UCP 500 sorts out the clauses according to types of document while UCP 600 collaborate the clauses with related processes. This makes it easier for relevant personnel to search and use the articles. Moreover, the UCP 600 used a separate article to define various terminologies, which used to be scattered for respective parties; strengthening the function of the banks operation procedures; distinguishing specific measurement to taken in refusing to honour or negotiate; and shortening the time incurred to manage discrepant documents. It can be expected that the implementation of UCP 600 will enable relevant parties to operate more effectively and reduce the possibility that a presentation does not apply.
Uniform Customs and Practice for Documentary Credits (UCP) promulgated by International Chamber of Commerce (ICC) has been adopted internationally and bas been deemed as the standard practice to the traders of international transaction. Implied in 1933 by ICC, labelled with the unique function of unifying the interpretations of the relative clauses with regard to the documentary credits, UCP offered a general mean of avoiding the complications between the traders in international transactions. Along with the development of the transportation, insurance and the innovation of technology, ICC have made several changes in 1951, 1962, 1974, 1983 and 1993 respectively.
On 1st July of 2007, the existing Uniform Customs and Practice for Documentary Credits, 1993 Revision, ICC Publication No.500 or UCP 500, which has been implied for 13 years was replaces with the new revision Uniform Customs and Practice for Documentary Credits, or UCP 600.
This paper consisted of 8 parts in addition to this introduction. It starts with the background information by introducing the virtual role of the letters of credit by exploring the fundamental functions of letters of credit in international transaction, which are documentary in nature, autonomy or independent principle and strict compliance. The next part focuses on the development of the regulation in term of documentary credit. Before replacing the UCP 500, Banking Commission appointed by the International Banking Commission considered various comments before agreement was reached on the UCP 600. The following part of this paper lays on the comparison of the UCP 600 both in structure and content as well. By comparison of UCP 500 and UCP 600, the current version set a new section of “Definition”, which lists 14 definitions including the new terminology: “Honour”. Subsequently, UCP 600 represents an easier language in interpreting the provision when referring to the latest version. In content, the UCP 600 removes the revocable letters of credit and regards irrevocable letters of credit as the default type of letter of credit since the former type was rarely used in modern international transaction. To this end, the key improvements of UCP 600 have been identified. The rest of the paper is structured as follows: part 5 represents the evaluation of the UCP 600. Before this can be accomplished, a discussion on the basis of concentrating on the details of the new provisions under UCP 600, such as the application of the new UCP, new definition of “honour” and comparison of revocable letters of credit and irrevocable letters of credit, and time allowed to the banks to examine the documents need to be established first. Part 6 focuses on the challenges and the problems the new UCP version may face, particularly concentrates on the exception of fraud. Part 7 designed to answer the question “does UCP 600 success where UCP 500 failed”. The evaluation in part 4 utilized in this part to summarise the improvements and arguments addressed with regards to the current version of UCP.
The importance of letters of credit in international transaction
Kerr J., in Harbottle v National Westminster Bank Ltd, said: “[letters of credit] are the lifeblood of international commence…”. The widely use of the commercial letters of credit for centuries has facilitate payment in international transactions. As a financial instrument, letters of credit has contributed immensely toward enabling buyers and sellers to meet midway.
There are three fundamental functions of letters of credit, and they are including: documentary in nature, autonomous or independent of the other contracts with regards to international sales contract and strict compliance. One of the most significant attributes of letters of credit is the autonomous or independence principle, which means the contract made by the letters of credit or performance guarantee completely separate from a contract between the seller and buyer. This principle was set on the basis of “commercial practice that the irrevocable letters of credit are negotiable and that the commercial community rely on the fact that banks cannot refuse to honour letters of credit provided that the documents or conditions referred to in the letters of credit are presented to the bank along with the bills…”. Another core principle is the strict compliance principle. The doctrine of strict compliance requires the bank to fulfil the duty to check the documents for any discrepancies, which means the documents have to strictly comply with the terms of the letters of credit in order to protect the interest of the buyers and the paying bank as well. In the third place, the nature of documentary of letters of credit enables the issuing banks to pay the sellers the price agreed upon the documents lists in the letters of credit. The nature of documentary of letters of credit reveals that the documents listed in the letters of credit should be the same as those required by the contract of sale.
Development of the new revision of UCP
With the development of banking, transportation and insurance, UCP 500 revision was outdated, over-complicated and open to ambiguity and error due to the uncertainty of the clauses setting and the languages used in the UCP 500 revision, for instance, the definition of “negotiation”. The main dispute in international transaction governed by the UCP 500 was based on the definition of “defect”. Normally, defect could be categorized as follows: late shipment, credit expired, late presentation, partial shipment, transhipment effected, earlier shipment, stale documents, short shipment, overdrawn, unit price incorrect, trade terms incorrect, irregular shipment, air waybill instead of ocean B/L, port of loading not complied with L/C stipulated, port of discharge not complied with L/C stipulated, L/C transferred, L/C transferred not effected by the bank, some documents not presented, weights differ between document.
Aiming at ascertaining the definitions of the relative clauses and providing a comprehensive understanding of the letters of credit, on 1st September 1994, Commission on Banking Technique and Practice published four Position Papers on UCP 500 to correct some misinterpretations. Those Position Papers emphasis on UCP 500 sub Article 9(d)(iii) – Amendments; sub-Article 10(b)(ii) – Negotiation; sub-Article 13(c) – Non-documentary conditions; and the related sub-Articles of Articles 23, 24, 25, 26, 27, 28, 29 and 30 – Transport Documents. On July 1999, Commission on Banking Technique and Practice published “The determination of an ‘Original’ document in the context of UCP 500 sub-Article 20 (b)” titled with Document no. 470/871 Rev. The decision emphasized the need to correctly interpret and apply sub Article 20 (b) of UCP 500. ICC Rules for Documentary Instruments Dispute Resolution Expertise or ICC DOCDEX Rules was in effect from 15 March 2002, it provides an independent decision on “how the dispute should be resolved on the basis of the terms and conditions of the documentary credit, the collection instruction, or the demand guarantee and the applicable ICC Rules”. The next attempt taken by ICC was the International Standard Banking Practice or ISBP published in 2003, which is consistent with the UCP 500 and the Opinions and Decisions of the ICC Banking Commissions in order to “explain how the practices articulated in the UCP are applied by documentary practitioners”.
Those attempts led to the result that “approximately 70% of documents presents under letters of credit were being rejected on the first presentation”, which was as being to high as to “have serious implications for maintaining or increasing market share” of the letters of credit, as pointed out by ICC from the introduction of UCP 600. To address the concerns, the Banking Commission established a Drafting Group to revise UCP 500 to address developments in banking, transportation and insurance industries, which is the main objective of the UCP 600. In addition, “there was a need to look at the language and style used in the UCP to remove wording that could lead to inconsistent application and interpretation”.
Although the UCP have no legislative force, it is in effect the world standard for most of the anticipants of the letters of credit as they are benefit from this “soft” regulation. Major amendments to the UCP 500 were relevant to all traders involved in international letters of credit transactions. After three years of rigorous view, the provisions of UCP are more user-friendly, in structure and in language as well.
Comparison of UCP 500 and UCP 600
The comparison is a relevant and necessary way to evaluate the switching from UCP 500 to UCP 600. The following part of this paper concentrates on those parts of the UCP 600 in comparison with the previous provision.
Comparison with the structural changes between UCP 600 and UCP 500
In the first place, the UCP 500 comprises 49 Articles whereas the UCP 600 was reduced to 39Articles, which are simpler, clearer, more concise and more organized. The 49Articles of the UCP 500 were divided into seven main parts, and they are including: General Provisions and Definitions; Form and Notification of Credits; Liabilities and Responsibilities; Documents; Miscellaneous Provisions; Transferable Credit and Assignment of Proceeds. Whereas in UCP 600, all the articles could be categorised in according to the procedure of the documentary credits, namely General Provisions and Definitions (Article 1-3); Form and Notification of Credits (Article 9-11); Liabilities and Responsibilities (Article 4-8 and Article 14-16); Nominated Banks (Article 12-13); Documents (Article 17-28); Miscellaneous Credits (Article 38); and Assignment of Proceeds (Article 39). One of the main advantages of the new UCP in comparison of the previous version is that it offers a clearer direction for the international traders when referring to the UCP.
In the second place, the new UCP provides a new section of “Definitions”, which containing terminologies, for instance, “honour” and “negotiation”. Most of the definitions listed under Article 2 are lined up on the stage of UCP from behind apart from “honour”, “negotiation” and “presentation”. The definition of “honour” identified three types, and they are: credit is available by sight payment; deferred payment credit under deferred payment or maturity payment; acceptance (promise against bills of exchange) together with payment at maturity under acceptance credit.
Comparison of the changes in content between UCP 600 and UCP 500
One of the remarkable changes made by UCP 600 is that it removes the relevant sections with regard to the revocable credit (remove Article 6 and Article 8 in UCP 500). In UCP 500, it clearly stated that the letters of credit could be either irrevocable or revocable. And the UCP 500 established that the revocable letters of credit could be amended or cancelled at any time before making payment. On the other hand in UCP 600, the irrevocable letters of credit is set as the default credit. Given the interpretation stated in Article 3 of UCP 600, “A credit is irrevocable even if there is no indication to that effect”. The removal of revocable credit from UCP 600 strengthens the independent function of the letters of credit and then allows the banks and parties binding by the contract perform the letters of credit in accordance with their own terms. It also enables the banks to achieve the principle of autonomy otherwise the interest of beneficiary would not be guaranteed and affect the function of the letters of credit as well. In practice, according to Article 1 of UCP 600, under the circumstance “when the text of the credit expressly indicates that it is subject to these rules”, the revocable letters of credit shall be listed in the documents if needed.
Secondly, UCP 600 simplified the wording and language of the previous one to a leaner set of rules with 39 Articles rather than the 49 Articles of UCP 500:
Initially, Article 1 of the UCP 600 adopted the terminology of “rules” for the first time, which apply to any documentary credit. Given the definition of Article 1, when referring to the UCP 600, the rules are binding on all the parties, unless exclude or modified by the documentary credit. On the other hand, there was no formal status given in UCP 500 only by stating that the UCP 500 would apply to documentary credit. Besides, in UCP 600 it removes the clause of “unless otherwise expressly stipulated in the Credit”, which was scattered through the UCP 500.
In the second place, by comparison of UCP500, it deems that the UCP600 is more applicable. The stipulations of the revised one are more rigorous, unanimous and explicit. Take the Article16 (c) as an example in which concerning discrepant documents, waiver and notice. Once the bank decides to ‘refuse to honor’, ‘a single notice’ is necessary for the bank to perform its purpose. Furthermore, regarding the tolerance of ‘5% more or 5% less’, the Article30 (b) in respect of tolerance in credit amount, quantity and unit prices stipulates in a manner that ‘[a] tolerance not to exceed 5% more or 5% less than the quantity of the goods is allowed’. It significantly eliminates the semantic confusion generated by the former provision in UCP500, in which the Article39 (6) correspondingly regulates ‘a tolerance of 5% more or 5% less is permissible’. Simultaneously, this revised clause as well is consistent with the Article 30 (a) of UCP600 with respect to the explanation of ‘about’ or ‘approximate’. Thirdly, the expression mode—and/or in UCP500 are almost all revised into the single term—or. This modification is concerned to enforce the transparency of the former provisions.
In the third place, except for the 39 provisions of UCP600, insofar as the practitioners of letter of credit are concerned, the provisions in ISBP regarding explanations of relevant issues should be taken into account as the references of UCP600. In UCP600 Article 14 (d) clearly reveals that in reading data in a document, the international standard banking practice should be utilized as an important reference. The UCP mainly stipulates the relationship between issuing bank, confirming bank and applicant, beneficiary, as well as the notes exchange and settlement of debt and claims among appointed banks. The functions of ISBP, however, are providing for detailed and accurate explanations concerning how to apply the UCP600 in daily practice, with the purpose of increasing the ability of practitioners in examination of documents and unifying the practices world widely.
In the forth place, the UCP600 illustrates its ambition of keeping abreast of the new era with the methods of amending or deleting those provisions which are concerned as declaration; the contents are out of date; or are incompatible with the actual practice. In respect of the parts deleted, the Article5 (a) regarding the instructions for the issuance of a Credit and the Credit per se, as well as the instructions for an amendment and the amendment per se, of which the requirements must be ‘complete and precise’, are concerned as declarations without actual usage. The Article8 with respect to the revocation of a Credit has been demonstrated that it should have not enforced both in theory and practice. The Article12 regarding incomplete or unclear instructions are defined as frothy clause. Lastly, the Article24 and Article25 (a) (vii) respectively concerning non-negotiable sea waybill and the carrying vessel propelled by sail only cannot conform to the conditions of modern marine transportation. In the Article36 of UCP600, however, it supplements the acts of terrorism in this force majeure clause for the bank’s avoidance of responsibility generated by it. In that the terrorism has become an undeniably potential factor intervening in the modern business. These deletions and supplementations indicate that the UCP600 keeps pace with the development of finance business.
In the fifth place, the descriptions of new provisions in UCP600 are clear and accurate, which significantly avoid the confusion in understanding and applying them. Article2 defines 14 terms, which are necessary to be clarified in this file, whereas Article3 interprets 12 issues in which the conflicts may arise when applying these provisions. 14 definitions first and 12 interpretations thereto clarify the potential confusions and conflicts in an effective manner. For example, in Article2 the ‘honour’ clause stipulates all the methods of payment except the alternative method negotiation. Banking day means ‘[a] day on which a bank is regularly open…’ Complying presentation means a presentation, which is consistent with the terms and conditions of the credit, the applicable provisions of these rules and ISBP.
In the sixth place, the UCP600 modified some details in respect of regulations and definitions. Insofar as the day to determine whether a representation is complying, the Article14 (b) provides for ‘a maximum of five banking days’. In the UCP 600, it restricts the time limits for completing the examination of documents, the time is shorter and this makes the description clearer.
Another different is that the Article19 of UCP600, which is concerned as the modification of Article26 of UCP500, amends the multimodal transport document in UCP500 into ‘at least two different modes of transport’. Except for the multimodal transport document, it includes the combined transport document.
Finally, the UCP600 provides more convenience for the transactions and banking services than the formal UCP 500. In respect of the dealing with the discrepant documents, four methods are clearly stipulated in Article16 (c) (iii). This stipulation is convenient for both the beneficiary and applicant. As to the lost of the document in transit, it indicates that no matter whether the documents have been lost in the transit between nominated bank and issuing bank or confirming bank, or between the confirming bank and issuing bank, once the nominated bank determines the presentation is complying, an issuing bank or confirming bank must honour or negotiate, or reimburse that nominated bank regardless whether the nominated bank has honoured or negotiated. Furthermore, regarding of transferable credits the Article38 (i) supplements provision in respect of the responsibility of transferring bank to the first beneficiary. This provision is convenient for banking services.
Evaluation of the UCP 600
The following part would focus on the examination of the new set of rules in detail in order to evaluate whether the provisions of UCP 600 achieve the predict goals of all stakeholders involved in the transaction. The evaluation is an important consideration due to the critical role of letters of credit in international trade finance, thus, the rules governing the letters of credit is primary to offer a certainty and stability standard with a predictable outcome.
The application of UCP 600
First of all, as stated by Article 1 under UCP 600, it is not automatically applicable to the letters of credit. The traders in international transaction have the freedom to choose to derogate or amend the articles only by expressly indicating between the parties. The set of rules in the new version of UCP would take effect by contractual incorporation and thus the validity and enforcement of UCP 600 rely heavily on the will of the parties and national laws.
As pointed out by Article 1, the rules only apply “when the text of credit expressly indicates that it is subject to these rules”. Although UCP 600 adopts the terminology of “rules” in Article 1, it is not a legal regime automatically applicable to all letters of credit. In other word, traders in international letters of credit transaction are voluntary refer to the provisions of UCP 600, which are devised by the ICC for express incorporation into letters of credit. As a contractual stipulation, the UCP 600 has to be expressly included into an agreement by reference.
As for the individual article of UCP 600, it is admissible to exclude the individual article when opening a letter of credit. As stated by Article 1 under UCP 600: “They are binding on all parties thereto unless expressly modified or excluded by the credit”. An example of this exception is Article 23 c (i) of UCP 600.
Another issue was addressed in UCP 600 with regards to the standby letters of credit. Although individual article are applicable for standby letters of credit, the majority of articles under UCP 600 are not applicable to standby letters of credit since standby letters of credit is not deemed as a payment instrument whereas UCP 600 is designed to serve in the payment for goods and service between a buyer and a seller. As Roy Goode observed that the UCP 600, which issued by trade and professional organisations could contribute to the development of uniform transactional rules to a considerable extent by establishing usages, which transcend the codes themselves.
Evaluation on the new definition of “Honour”
Article 2 of UCP 600 introduces new definition section particularly the meaning of “Honour”. This new provision however is one of the debatable topics for professionals and experts. The original four types of letters of credit are replaced by a joint name- honour, which are divided into three categories: letters of credit are available by sight payment, deferred payment and acceptance. According to the definition, the payment under negotiation credit was excluded from honour, whether by negotiating bank or issuing bank. In UCP 500, negotiation was defined as the giving of value for draft(s) and/or documents(s). Nonetheless, when turning to the definition of “negotiation” providing by UCP 600, it was changed to a purchase activity rather than a payment type. Any purchases made by the nominated banks would be deemed as the negotiation. On the other hand, any payment made by the issuing bank at sight or at maturity would not be regarded as negotiation. Further, nominating from the issuing bank under deferred payment credit and acceptance credit includes two acts: promise and payment at maturity. However, the classification failed to make the nomination from issuing bank more explicit, this is because according to Article 12 (b) of UCP 600,which is new clause too, prepayment before maturity also evolved in the nomination from the issuing bank. Given the concerns above, it is unnecessary to classify the definition of “honour”.
Revocable letters of credit vs. irrevocable letters of credit
One of the most remarkable different between the UCP 500 and the latest version of UCP 600 is the default type of letters of credit. In UCP 500, it was clearly established that the letters of credit could be either revocable or irrevocable. Article 8 revealed that a revocable credit could be amended or cancelled at any time without notice to the seller. In contrast, Article 3 of the UCP 600 indicates that the default type of letters of credit is irrevocable credit even without indications to that effect, which means if the credit did not clearly and specifically express which type it was, it could be assume that it was irrevocable credit. Irrevocable letters of credit is defined in Article 2 in UCP 600 as “any arrangement, however named or described, that is irrevocable and thereby constitutes a definite undertaking of issuing bank to honour a complying presentation”. Further, Article 10 (a) make the provision relating to irrevocable letters of credit more explicit: “a credit can neither amended nor cancelled without the agreement of the issuing bank, the confirming bank, if any, and the beneficiary”. These three articles consolidated the preference of the new UCP 600 with regard to the irrevocable letters of credit- to favour the interest of the sellers and the beneficiary as well.
The provisions regarding to the irrevocable letters of credit address two points of concerns. In the first place, there are no rules apply when a letters of credit under UCP 600 stated that it is revocable although the UCP 600 is in favour of irrevocable letters of credit. The traders in international transactions may face the conflict that the applicant or an issuing bank are have the freedom to choose to open a revocable letter of credit, however, as a matter of fact, the new UCP apply in terms only to irrevocable letters of credit. In general, the first issue is that although the UCP are adopting the terminology of “rules”, it is necessary to set the general principle to balance the practical freedom of choice of revocable and the fact of the UCP 600, which is a set of terms available for contractual incorporation.
However, it should be recommended here that although the UCP600 swung the pendulum of letter of credit from the revocable side to the irrevocable side, nothing in the new rules could be found to clearly prevent the opening of a revocable letter of credit. In general there are two reasons supporting this argument. Firstly, an applicant and an issuing bank are free to open a revocable letter of credit simply because of the general principle of freedom of contract. In a further step, the UCP600 are merely a set of terms available for contractual incorporation irrespective of their claiming themselves ‘rules’.
According to this logic, it became even more vague that if a revocable letter of credit which clearly states its incorporation of UCP600 will be subject to the UCP600. From the perspective of pragmatic approach, it is argued that the UCP600 can be applied to the revocable letter of credit with proper modifications. In ordinary the parties intending to apply the UCP600 to a revocable letter of credit to incorporate the rules into the credit will add a clause explicitly excluding the definition of ‘credit’ in Article2 of UCP600, which will be obviously violated by the incorporation of UCP600 into revocable letter of credit. Nevertheless, it deems that regarding this point, the incorporation of UCP600 should adopt a narrow approach, i.e. it is not permitted to apply the rules to a revocable letter of credit. In that the delimitation of ‘credit’ in Article2 can be considered as the premise of incorporation of these rules. Without satisfaction of this premise it is consequently impossible to apply the rules to a revocable letter of credit.
In general, even if the UCP set the irrevocable letters of credit as the default type, the parties are still freely choose to open a revocable letters of credit. Under this circumstance, no relevant provision would be applicable for revocable owing to the removal of revocable letters of credit under the new UCP.
The evaluation on the time allowed to the banks to examine the documents in UCP 600
Another argument lays on the time given to the banks to examine the documents. UCP 600 adapts the “five banking days” instead of “reasonable time” or “not to exceed seven banking days”.
Under the UCP 600, the old provision allowed the banks a “reasonable time, not to exceed seven banking days following the day of receipt of the documents”. This provision stated in Article 13 (b) UCP 500 was replaced by “a maximum five banking days”. Under the UCP 500, there was either in express terms or implied terms for agreement of the time of documents examination. The expression of “reasonable time” in UCP 500, which indicates a relative flexible interpretation and application in individual cased may be affected by various factors from different legislations and then leads to the results of complexity and uncertainty in practice. Instead, the UCP 600 highlight the specific time to avoid the problem of discrepancy in interpreting the “reasonable time”. Under UCP 500, banks may not be justified to pay after using up full seven banking days, considering the requirement for reasonable time; whilst under UCP 600, banks may be justified to pay after using up full five banking days.
On the other hand, it is arguable that the omission of the “reasonable time” may give rise to a new issue. The new provision under UCP 600 attempts to give each bank involved in the letters of credit a fixed time to examine the documents. However, according to Article 14 (b), it only provides the bank the capability five days to examine the documents where it is need. The bank is entitled to pay without risk of liability towards the buyer on the day if the documents comply.
The similar situation may happen to a bank that Article 14 (b) allows the bank to examine the documents in five banking days while according to Article 15 under UCP 600 the bank must honour or negotiate. The possible consequence of this is that the bank would be in breach of its duty to pay the beneficiary and would be liable towards the beneficiary.
Problems may not be solved by UCP600
Although the functions of UCP600 cannot be denied in the banking practice, still they are several issues cannot be solved well. It is argued that there is no reference to money laundering rules in the UCP600, which is concerned as a weakness of these rules. However, is deems that to include the requirements of criminal money laundering offences with the rules of banking practice which are voluntarily incorporated by parties could be somewhat odd. Other than this, there are two problems deserved to be critically discussed hereinafter, viz. exception of fraud and the principle in the Santander decision. It deems that the occurrence of these situations is mainly resulted from the nature of UCP600 that they are not the definite legislative rules.
Exception of fraud
In any sale of goods, the risk that the goods supplied may be defective cannot be neglected. Given the defect of goods are serious, for example the inappropriate goods are delivered or even no goods is delivered, it can be illustrated by the buyer that the seller is dishonest. Regarding the UCP600, in Article 4 there is a general principle stipulating that what the bank concerns are merely the documents but not the performance of specific performance. That is to say, once there is a breach of contract, the applicant cannot stop its bank from fulfilling its obligation to honour the credit in which the documents presented comply with its requirements superficially. It is said that any dispute resulted from the nature of the contract or even mo
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