UCP 600

Paris, 25 October 2006 The UCP remain the most successful set of private rules for trade ever developed By a unanimous vote of 91 to 0, the ICC Banking Commission today approved UCP 600, ICC's revised rules on documentary credits. This is the first revision of the rules since UCP 500, the previous version, was approved in 1993. The new rules are the result of more than three years of intensive work by the banking commission. Used by letter of credit practitioners worldwide, the Uniform Customs and Practice for Documentary Credits (UCP) are the most successful private rules for trade ever developed. They were first issued in 1933 when ICC, to overcome the conflicting laws on letter of credit in different countries, created a set of rules to bring uniformity to the field. Now firmly established, the UCP are the essential ground rules for billions of dollars in trade transactions every year. The revision, which will come into effect on 1 July 2007, incorporates a number of changes from UCP 500: New sections on "definitions" and "interpretations" have been added to clarify the meaning of ambiguous terms The phrase "reasonable time" for acceptance or refusal of documents has been replaced by a firm period of five banking days New provisions allow for the discounting of deferred payment credits Banks can now accept an insurance document that contains reference to any exclusion clause These and other changes will have to be carefully studied by bankers, traders, corporations and other practitioners in the seven months remaining before the new rules are implemented. The ICC Business Bookstore ( www.iccbooks.com ) will offer UCP 600 in several formats – book, leaflet and eBook. UCP 600: “A document restoring the credibility of L/Cs” by Pradeep Taneja Little did the drafters of the first UCP in 1933 realize that they were leaving a legacy that would, one day, convert the L/C from a payment vehicle into a means to avoid payment. Instead of a tool and a technique for the settlement of trade transactions, the UCP provisions would be frequently misused, misinterpreted and manoeuvred as a mechanism for raising unwarranted disputes and disagreements. This would shrink usage of L/Cs in international commerce and induce the international business community to shun L/Cs, whose numbers are now believed to be waning worldwide, even after successive revisions of UCP to “adapt” to evolving market practices. It was thought that UCP 500, the 5th revision of UCP, would arrest this trend. The rules were credited with many “firsts”. What constituted a negotiation, reasonable time, the appropriate number of days to check the documents? What should be done with non-stipulated documents, etc.? But while UCP 500 offered many improvements over UCP 400 and attempted to answer the above questions and much more, it also acknowledged the uniqueness of a marine, ocean and port-to-port bill of lading and defined discrete transport articles so as to reduce the scope for misinterpretation and misapplication of such articles. Contentious issues What followed was not what was expected. The need to clarify several of the articles of UCP 500, accompanied by market developments, highlighted, inter alia, several contentious issues that needed to be addressed. For example, there were issues relating to the term “negotiation” and what constituted an original document in the context of sub-article 20(b). Another question concerned which “ports” on a marine bill of lading were “ports” as per UCP 500. In addition, questions were raised concerning ports of delivery and discharge, and imprecise interpretative phrases like “without delay” and “on its face” diminished the commendable accomplishments of the rules. International traders became wary of L/Cs in fraudulent situations, as it became increasingly difficult to dispute the interpretation of the term “reasonable care” in court. It took several court cases to conclusively establish that “reasonable time” did not automatically mean seven banking days, but that, depending on the circumstances, the seven days was a “maximum” and that any period between one to seven days following the day of receipt of documents could be considered to be reasonable. Moreover, the problems of non-documentary conditions and inconsistent data were not satisfactorily addressed. Deferred payment What compounded the problem was the thorny issue relating to the discounting of deferred payments that arose out of the Banco Santander vs Banque Paribas case, in which the court ruled that if a confirm‎ing bank discounted its own deferred payment undertaking it did so at its own risk, and if fraud were established prior to the maturity date, the issuing bank was not obliged to reimburse the confirm‎ing bank. This ruling shocked many banks, and I know some bankers in the Middle East who resorted to increased issuance of deferred payment L/Cs, but when it came to adding confirmations insisted on acceptance credits, presumably believing, in the light of above ruling, that they were protected in cases of fraud. They failed to recognize that in documentary credit rules, fraud is an exception. This stance on the part of bankers adversely affected cash flows of many exporting companies. UCP 600 Enter UCP 600 – the most reviewed and commented upon document in the history of UCP – which involved an intensive effort of over 3½ years to address the above problems and others. The revision process included 15 drafts by a Drafting Group comprising 10 world renowned professionals, a Consulting Group consisting of 41 global experts drawn from banking, transport, insurance and legal sectors from 26 countries, and a review of almost 600 Banking Commission opinions, various DOCDEX decisions and relevant court cases, plus over 5000 comments from more than 40 ICC National Committees across the globe But will UCP 600 succeed where UCP 500 failed? Will the new rules halt the decline in the use of L/Cs? Notwithstanding comments from some of my fellow L/C practitioners that implementation of 600 will be difficult, time consuming and costly – with the need to review policies, procedures, systems and training of bankers, lawyers, traders, etc. – I am confident that it will. In fact, I contend that UCP 600 will restore the respect, credibility and rightful place of L/Cs in international commerce. I further believe that UCP 600 corrects the misinterpretations that resulted from UCP 500. My assertion is based on the following features, amongst many others, found in UCP 600. - First, the drafters of UCP 600 have taken the initiative to alter the too technical and difficult-to-understand wording of UCP 500 into a plain, simple, precise and concise language with the inclusion of terms that are easy to comprehend. - The singular achievement of UCP 600 is its elimination of phrases like “reasonable care”, “reasonable time” and “on its face” (except in one article) from the rules. This should help reduce instances of costly court cases, meaning that the main affected parties could be members of the legal community, who will be deprived of the hefty fees they charge to prove or disprove what “reasonable” or “on its face” meant. - The introduction of separate articles 2 and 3 on “Definitions” and “Interpretations”, which contain the novel concept of “honour”, along with the inclusion of certain ISBP paragraphs in UCP, should bring about far greater clarity and precision than in many of the contentious articles in UCP 500. - The definitive description of negotiation as “purchase” of drafts and/or documents should help lay to rest the controversies surrounding the term “negotiation”. - A recognition that UCP are “rules”, that a credit is “irrevocable” and that it is banks and not “all parties” that deal with documents and not goods should bring greater exactitude to the rules. - The recognition that it is the issuing bank’s responsibility to honour drafts and/or documents drawn under L/Cs; it is now clear that credits MUST NOT call for drafts drawn on the applicant, and not just that they SHOULD NOT. - There has been an attempt to resolve the Banco Santander problem by establishing a definite undertaking of issuing and confirm‎ing banks to reimburse on maturity whether or not the nominated bank prepaid or purchased its own acceptance or deferred payment undertaking. - Further, nomination now also means authorization to prepay or purchase a draft accepted, or a deferred payment undertaking incurred, by that nominated bank. I am sure that many bankers in the Middle East and elsewhere will heave a sigh of relief and will not be hesitant now to prepay their acceptances or deferred payment undertakings. This should be a boon for exporters. - The removal of “reasonable time, not to exceed seven banking days” for checking documents and its replacement by five banking days should speed the process and make L/Cs more attractive in the market. - The resolution of the problem of inconsistency in the data by stating that data in a document need not be identical to, but must not conflict with, data in that document or any other stipulated document will certainly lead to reduction of discrepancies (even though many bankers will be disappointed by the reduction in discrepancy fees they had been collecting under UCP 500!) - The provision for returning documents not required by the credit to the presenter will save many document checkers the time and effort they would have otherwise spent being duty-bound to meet compliance requirements if beneficiaries insisted that they pass such documents on to issuing banks as per UCP 500. - The provision that the addresses of applicant and beneficiary appearing in any stipulated document need not be same as long as they are within the same country will stamp out many an L/C dispute based on irrelevant differences. - The option, while refusing documents on account of discrepancies, to hold documents until receipt of waiver, provided such waiver is acceptable, should free the issuing bank from many unwarranted obligations towards the beneficiary (concerning unauthorized waiver and delivery of documents to the applicant without prior authority of the beneficiary/negotiating bank), and/or the applicant forcing the issuing bank to take up documents upon the applicant’s waiver of discrepancies. - A new separate article defining what constitutes an original document transfers this necessary information from an ICC “Decision” to where it belongs – in the rules. The above are just some of the noticeable advantages of UCP 600. I could go on pointing out the positive changes in the transport and insurance articles, but I leave that to the experts in the respective areas, particularly since these articles have been reviewed by experts in transport, commercial law and insurance. Whatever detractors of UCP 600 may say, I repeat that UCP 600 will go down as a document restoring the credibility of L/Cs in international commerce.