The UCP 600

 

Developments In Documentary Credit Law


The Uniform Customs and Practice for Documentary Credits (UCP) is a set of rules governing credits drafted by the International Chamber of Commerce (ICC). The UCP is periodically reviewed and updated by the ICC Banking Commission. Since 1993, the UCP 500 has applied, which governed all documentary credits that incorporated the UCP into their terms. As of 1 July 2007, however, the new revision came into force; the UCP 600.

The Banking Commission was authorised to begin a revision of the UCP back in May 2003. This revision was in reaction to several pressures. First, there was concern over the prevalence of rejection of the documents presented in order to claim under a credit. When the revision began, global surveys showed that approximately 70% of documents presented were being rejected on first presentation because of discrepancies. This was considered by the Commission to constitute a serious threat to maintaining and increasing the use of documentary credits as a means of payment in international trade.[1]

There was also a perceived need to address developments in the industries that are affected by the terms of the UCP, namely the banking, transport and insurance industries.[2]Further, there was a need to consider a revision of the language and style of the UCP in order to remove wording that could lead to inconsistent application and interpretation.[3]

After more than 3 years of review, debate and analysis the drafting group released the UCP 600. The UCP 600 is shorter than its predecessor, coming in at 39, rather than 49, articles. The new UCP also looks different; it is not arranged into sub-parts as is the UCP 500, although it can be broken up in much the same way.

The new rules do not substantially change all of the terms of the UCP, in fact many of the Articles have remained materially unaltered. They have, however, effected changes in certain areas. This article will highlight the main changes made by the Banking Commission to the UCP and the effects that these changes will have upon the use and effect of documentary credits.

top

Main Amendments

Application

The first noticeable change to the UCP is in the very first article, which governs application. In the UCP 500, the application was "to all documentary credits...where they are incorporated into the text of the Credit." Thus for the UCP to apply, it must be stated to apply in the Credit itself. The overwhelming majority of credits do incorporate the UCP. Courts in both the United States[4] and England,[5] however, have held that because the UCP is so well entrenched into the law of documentary credits, it will apply even if the credit does not expressly set it out.[6]

This jurisprudence may be excluded entirely from application to the UCP 600 as the application in article 1 has been amended to read that it will apply "when the text of the credit expressly indicates that it is subject to these rules." The inclusion of the word 'expressly' limits the over-application of the UCP and it will be interesting to see whether this line of jurisprudence is developed or reversed. It is not clear what rules will be applied if the UCP 600 is not incorporated; it may be possible that the courts elect to continue to apply the UCP 500 to such credits. This somewhat undermines the intention to create certainty into letter of credit law.

Definitions and Interpretations

Articles 2 and 3 of UCP 600 create new definition and interpretation sections. These are designed to make the UCP 600 more accessible and easier to read. Article 2 contains definitions of ‘advising bank', ‘applicant', ‘banking day', ‘beneficiary', ‘complying presentation', ‘confirmation', ‘confirming bank', ‘credit', ‘honour', ‘issuing bank', ‘negotiation', ‘nominated bank', ‘presentation' and ‘presenter'. Setting out these definitions prevents repetition of the meaning of the terms used throughout the subsequent articles. The aim of the interpretations in article 3 is remove or limit the ambiguity of vague language that may be used in letters of credit. It also clarifies other characteristics of the UCP and of credits.

Revocable Credits

Another important amendment is the removal of revocable credits. Under the UCP 500, article 6 distinguished between revocable and irrevocable credits and article 8 further provided for the revocation of a credit. There was a preference for irrevocable credits in UCP 500, as it there was a presumption that a credit would be irrevocable if it did not expressly set out whether it was revocable or not. The UCP 600 by contrast does not expressly deal with revocable credits.

This firm move away from revocable credits is demonstrated in articles 2, 3 and 10. Article 2 defines a credit as "any arrangement, howsoever named or described, that is irrevocable and thereby constitutes a definite undertaking of the issuing bank to honour a complying presentation." Article 3 adds to this that a credit is irrevocable even if there is no indication to that effect. Further, article 10(a) makes it apparent that without the consent of the beneficiary, a credit cannot be revoked. This default position, that credits are irrevocable, favours the interests of the seller/beneficiary who has the benefit of a binding obligation from the bank that payment will be made on presentation of conforming documents.

It is important to note however, that the UCP 600 does not completely remove the ability to use revocable credits. This is because article 1 makes it possible for traders to expressly exclude any of the terms. Thus a trader may choose to open a revocable credit and exclude those parts of the UCP that prevent revocation. It is therefore sensible for sellers to stipulate in their sales contracts that they require an irrevocable credit that is subject to the UCP 600.

Standard of Examination

The rules governing the examination of the documents have moved from article 13 in the UCP 500 to Article 14 in the UCP 600. The thrust of these rules have remained the same, but some significant modifications have been effected. First, the basic duty of examination in article 14(a) has been reworded. Specifically, the words "with reasonable care" have been omitted. This omission is unlikely to have any effect as banks are under a duty to use care in examination of the documents in any case. The insertion of the phrase "on the basis of the documents alone" however, is likely to be more significant. This essentially reiterates the statement in Article 5 that banks deal with the documents only, and it strengthens the principle of autonomy.[7] This new wording signals that banks are not to look to extraneous material when determining compliance.[8] This ensures that credits are not rejected due to extraneous evidence that suggests there may be a reason not to honour them, even where the presentation is compliant. By rejecting this possibility the UCP 600 ensures that credits remain a dependable means of settlement for traders.

Another change in article 14 relates to the amount of time that a bank has in order to accept or reject the documents. Under the UCP 500 a bank had "a reasonable time, not to exceed seven banking days"; this formulation led to disputes over interpretation. Now, a bank has a maximum of 5 banking days following the day of presentation in which to accept or reject the documents. Article 2 defines "banking day" as "a day on which a bank is regularly open at the place at which an act subject to these rules is to be performed." This means that whether or not a particular day is a banking day will depend upon the place in which the act is being performed (for example where the documents are presented). The new 5 banking day rule has the benefit of certainty over the previous uncertainty. Prudent applicants and beneficiaries ought, however, to familiarise themselves with the regular banking days of the place of the issuing, confirming and negotiating banks.

Another more minor change in article 14, but particularly interesting to those interpreting the new rules, is the omission of the requirement that a bank examine the documents to determine compliance in accordance with "international standard banking practice as reflected in these articles". This formulation was set out in article 13(a) of the previous UCP. Article 14(d) of UCP 600 does require a bank to refer to international standard banking practice in examining the data in a document, but omits the phrase "as reflected in these articles". The significance of this is yet to be seen, but may be very limited as the UCP is itself designed to define and reflect standard banking practice.

Original Documents

Under the UCP 500, there was controversy surrounding article 20(b) which governed what could be accepted by banks as 'original' documents. That article allowed banks to accept as original documents that had been produced by automated or computerised systems, provided they were marked as original and (if necessary) signed. This led to conflicting interpretation. The first case to deal with this Article was Glencore International AG v Bank of China.[9] In that case, it was held that in order to be considered original, a document produced by the means listed must be both marked as original and signed. Signature alone was not sufficient to establish the originality of a document.

The following year however, the case of Kredietbank Antwerp v Midland Bank Plc,[10] arose. That case took a different interpretation of article 14(b), which was that it was intended to add to the pool of documents that could be accepted as original. Therefore the section was read as only applying to copies produced by the means listed and not to originals. It was held that documents that appeared on their face to be original, should still be accepted as original regardless of the means by which they were produced.

A third case Crédit Industriel et Commercial v China Merchants[11] attempted to reconcile these two judgments. It was held that documents which are not obviously original must be marked in accordance with Article 20(b) if they were, or appear to have been, produced by one of the methods listed in that Article. But documents which are obviously original, or which would have been accepted as original prior to the UCP must be accepted, even if they are produced by one of the Article 20(b) methods and not marked "original".[12]

The UCP 600 has dealt with this conflict in Article 17. This Article sets out that "(b) A bank shall treat as original any document bearing an apparently original signature, mark, stamp, or label of the issuer of the document, unless the document itself indicates that it is not original." The Article goes on to state that a bank will also accept as original a document that: "appears to be written, typed, perforated or stamped by the document issuer's hand; or appears to be on the document issuer's original stationary; or states that it is original, unless the statement appears not apply to the document presented." By setting out exactly what can be accepted as original by a bank, the UCP creates greater certainty for both banks and users of credits. This will speed up the honour process and ensure that credits are still regarded as an efficient means of financial settlement.

Other Changes

In addition to the amendments set out above, the UCP 600 has also introduced various other changes. These cannot all be set out here, but include a new rule regarding when the addresses of the applicant and beneficiary in the documents must match those in the credit,[13] a new rule specifying the detail that the issuer must set out in a notice of honour,[14] redrafted transport articles which remove the confusion over the meaning of ‘carrier' and ‘agent'[15] and new rules governing issuer-proposed amendments. Overall, these changes create greater clarity and make the UCP 600 more accessible to all users of credits.

top

Conclusion

The new rules of the UCP 600 signal a move towards more certainty in letter of credit law. It clarifies the positions of each of the parties involved in the use of credits; that is the bank, the applicant and the beneficiary. This is achieved through the new articles 2 and 3, the disappearance of revocable credits and the clarification of both the standard of examination of the documents and the documents that can be accepted as original.

These measures are movements in the right direction to ensure that the documentary credit procedure remains as expedient as possible. There are some issues that are not dealt with by the UCP 600, however, which continue to cause controversy and confusion in the law of documentary credits. One such issue is the ambit of the fraud exception to the autonomy principle, which is not even mentioned in the UCP. Instead each jurisdiction takes a different approach to fraud resulting in uncertainty in this area of the law.

Another issue is the conflict of laws. The UCP 600 (and its predecessors) does not contain any governing law or jurisdiction clauses. This is because the credit law found in the UCP is based upon lex mercatoria. However, although there are some internationally accepted banking standards and practice there is no separate body of lex mercatoria. Thus although the majority of credit problems can be dealt with by reference to the articles there will inevitably remain some issues that will fall outside the UCP and be governed by domestic legal systems.[17] In failing to regulate the governing law and jurisdiction that is to govern documentary credit disputes, the UCP ignores the situation whereby plaintiffs will bring their claims in a forum most likely to grant a favourable remedy rather than the forum with the closest relationship to the credit transaction.[18] This decreases certainty in commercial relationships and allows a plaintiff to dictate where a dispute will be resolved to the detriment of the defendant.

All in all the UCP 600 makes positive strides towards greater certainty in letter of credit law, despite the fact that some key opportunities were missed. It is hoped that these issues will come to the fore in future revisions.

top

Footnotes

[1] See the ICC Uniform Customs and Practice for Documentary Credits UCP 600, Introduction, 11.

[2] Ibid.

[3] Such as the 'original document' requirement that created conflicting judicial interpretation under the UCP 500. See Glencore International AG v Bank of China [1996] 1 Lloyd's Rep 135 and Kredietbank Antwerp v Midland Bank Plc. Times, 31 October 1997 (QBD).

[4] See AMF Head Sportswear Inc v Ray Scott's All American Sports Club (1978) 448 F Supp 222, and Fertigo Belg SA v Phosphate Chemical Exports Assoc (1984) 100 AD 2d 165.

[5] Harlow and Jones Ltd v American Express Co. Ltd [1990] 2 Lloyd's Rep 343.

[6] Note that these cases refer to UCP versions prior to the UCP 500 and due to the unchanged wording of Article 1 of the UCP 500 continued to apply.

[7] The autonomy principle establishes that credits, by their very nature, are autonomous from the transactions to which they relate. Thus even if the underlying transaction is not performed, if there is a complying presentation of documents under the credit, the bank must honour.

[8] This is particularly significant when determining the ambit of the fraud exception to the autonomy principle; it will limit the fraud exception to instances when fraud can be established on the face of the documents alone.

[9] [1996] 1 Lloyd's Rep 135.

[10] Times, 31 Oct 1997 (QBD).

[11] [2002] EWHC 973.

[12] Ganotaki "Documentary Credits: Another Original Story" 2003 LMCLQ 151, 155.

[13] See article 14(j).

[14] See article 16(c).

[15] See, for example, article 20.

[16] See article 10.

[17] Such as the fraud exception, and the controversial illegality and nullity exceptions.

[18] Ellinger "The UCP-500: considering a new revision" 2004 LMCLQ 30, 43-44.

top

A specialist litigation firm