Article

Bulgaria

While the availability of the credit (field 41 of MT700) is metaphorically the "core" of every L/C, the paying instructions (field 78 of MT700) could be called the "mind". In any case, one point is undisputable - both items combined determine the settlement technique implemented during the time period starting from the compliant presentation of documents by the beneficiary and ending on the date when the beneficiary's current account is credited (i.e., value date). In other words, these two conditions directly affect the beneficiary's cash flow, whether in a negative or a positive way.

A number of specialized writings and articles exist concerning settlement techniques in cases in which the credit is available by deferred payment, by negotiation and by acceptance. By contrast, it would be difficult to find any writings which satisfactorily describe how the settlement mechanism actually works in the event the unconfirmed credit is available by payment at sight. Even if one finds an explanation, it usually reads along the following lines: "Should the credit be available by payment at sight, the issuing/nominated bank must pay at sight." This is an unhelpful tautology. Unfortunately, sub-article 2(a) of UCP 600 reaffirms this by its definition stating: "Honour means to pay at sight if the credit is available by sight payment" and also indirectly in sub-article 7(a)(ii), which states that "... the issuing bank must honour if the credit is available by ... sight payment with a nominated bank and that nominated bank does not pay ... ".

This leads to the following question: how much time would elapse from the date of making a compliant presentation until the aforementioned value date in the case of an unconfirmed sight credit? It seems the answer could be "a maximum of 10 banking days", which can be deduced from a careful examination of sub-article 14(b) provisions and calculated on the basis of a "maximum of five banking days". However, in almost all cases, the expectation of the beneficiary as to the settlement time period is more optimistic - 3-4 days maximum. Consequently, at this critical and uncertain stage of the L/C transaction, the beneficiary may suffer considerably from problems of cash flow management.

Nevertheless, not surprisingly L/C practitioners all over the world know exactly how the settlement mechanism works in the case of an unconfirmed "payment at sight" credit, available with either the issuing bank or the nominated bank. Unless a silent confirmation between the beneficiary and nominated bank has been agreed, the settlement technique and practice may be quite similar to that under another well established payment vehicle - the documentary collection, taking into consideration that the nominated bank examines the documents without any engagement and forwards them to the issuing bank. The latter examines the document in its turn and remits the proceeds following the nominated bank's payment instructions.

Needless to say, should the issuing bank furnish the credit with a reimbursement clause for the respective reimbursing bank, the settlement process - and therefore the beneficiary's cash flow status - would be improved. This is why, in my view, the unconfirmed documentary credit, payable at sight and without reimbursement clauses, does not constitute par excellence a documentary credit. Rather, it may be defined as a hybrid payment, combining elements of the L/C and the documentary collection.

To the best of my knowledge, until the early 1990s, the common recognized practice was that L/Cs issued with reimbursement provisions prevailed over those without such provisions. Nowadays, without any doubt, the proportions have been reversed. But the former practice was the better one and supported the L/C as one of the main payment vehicles in international trade.

Ivan Simeonov
Chief Expert, International Payments Division
Central Cooperative Bank, Sofia
e-mail: isimeonov@ccbank.bg

The above remarks represent his own views and not necessarily those of Central Cooperative Bank, Sofia.

South Korea

The UCP 600 is now in place. The main thrust of the revision was to reinforce the credibility of the credit instrument. By simplifying and streamlining the text, users are now able to understand the rules better than before.

However, the two factors undermining the credibility of the credit instrument are still alive and well. One is applicant-controlled conditions and the other is the mechanical determination of discrepancies.

The letter of credit is a simple instrument whereby an exporter can rely on the payment guarantee of a bank overseas to ship goods, to present required documents and, after reasonable examination of the documents by the nominated bank, receive payment. This is why the letter of credit has contributed to the development of world trade for the past two hundred years.

The above two factors, applicant-controlled conditions and mechanical determination of discrepancies, can undermine all that.

Although the exporter trusts the letter of credit to ensure payment after his part of the contract is done, he may suddenly find there was something the applicant had to do which did not materialize, or the issuing bank may have refused payment based on a discrepancy which is so technical that the exporter has a hard time understanding what is happening to him.

In Korea, we have seen two kinds of applicant-controlled conditions which have played havoc with the negotiating bank. One occurs when the applicant, after shipment, is supposed to send an amendment through the issuing bank indicating that the goods are in good order, with this amendment to be presented at negotiation. Sometimes the wording is included in a long paragraph, and the beneficiary and the negotiating bank only understand the import of the condition in the refusal notice.

Of course, the standard reply would be that the beneficiary and negotiating bank should have seen it coming and should have insisted on an amendment. But to tell the beneficiary and the negotiating bank that the letter of credit is a reliable credit instrument after such an experience would not be welcomed.

Another factor involves the inspection certificate issued by applicant with the signature to be verified by the issuing bank. Although someone purporting to be the applicant may issue the said document, the issuing bank may refuse it, claiming that the signature does not conform. (On closer inquiry, the issuing bank may reply that it does not have the specimen of the signatory.) But if neither the issuing bank nor the applicant claim that beneficiary forged the signature, and the beneficiary denies forging it, the negotiating bank will be at a loss as to whom to believe. In the meantime, payment will not be forthcoming and only criminal prosecution of either the beneficiary or the applicant will allow the negotiating bank to know the truth of the matter.

The mechanical determination of discrepancies has been with us for some time now. There appears to be a sense that someone who can point out numerous discrepancies in documents is an expert. In my view, an expert is someone who can explain why something minor is not a discrepancy and will insist in this situation that the issuing bank is obliged to make payment.

There was one case in which the beneficiary, not fully understanding the wording in the credit, failed after shipment to submit the DHL receipt which evidenced his sending copies of the shipping documents to the applicant. He had submitted a certificate that the documents had been sent, which was required in the credit. The DHL receipt was in addition to the said certificate.

Since it was not presented, the absent DHL receipt was cited as a discrepancy, and the issuing bank ended up refusing payment. The documents, representing a substantial amount, were returned to the negotiating bank.

It may not be easy to say that the above situation was not a discrepancy. Nonetheless, I wonder whether such "discrepancies", based as they are on insignificant issues, are not the reasons for the declining use of the letter of credit.

Chang-Soon Thomas Song
Senior Manager, International Dispute Resolutions
J.D. (Juris Doctor) Univ. of Arizona
Trade and Services Division, Korea Exchange Bank
E-mail: thomas@keb.co.kr

Spain

The entry into force of the new UCP will push us to abandon inertia and long-established habits and make us face new situations. As happens with any change, this one also causes some concern.

Even though the new rules are much clearer, and articles 2 and 3 with definitions and interpretations help to clarify many issues, we cannot conceal the fact that some anxiety remains concerning how the rules will develop and how they will be interpreted.

In Spain, the points that worry practitioners (to a greater or a lesser extent) are the following:

1. Article 1 of UCP 600 says that the rules are "binding on all parties thereto unless expressly modified or excluded by the credit". How many modifications or exclusions will we be faced with? Of course, UCP 500 already contained the possibility of exclusion, and it is also obvious that since the rules are not laws, they can be amended by users. But the title of the publication is ICC Uniform Customs and Practice (emphasis added), so if article 1 leaves open the possibility to modify the rules, we are concerned that this uniformity could be lost and a new era would be introduced with each bank using its amended version of the rules. The international banking community should fight to prevent that from happening, and should maintain UCP 600 as uniform rules.

2. In article 2, the rules define "Negotiation". The ICC Banking Commission discussed this word at length, but for many practitioners it remains a confusing term. Will the international banking community fully understand this concept and incorporate it into their modus operandi?

3. In general, article 14 of the UCP 600 is quite clear. Will that be enough to reduce the number of discrepancies having little foundation that block payments, or will we continue to see rejection of documents for insignificant reasons?

4. Sub-article 14(b) gives "a maximum of five banking days" to review, accept or reject documents. How many times will we see documents presented after the expiry deadline that users will try to include because they are allowed the five-day period?

5. Will the international banking community know how to interpet the concept included in sub-article 18(c) that "the description of goods, services or performance ... must correspond ... with that appearing in the credit"?

6. Sub-article 26(c) allows transport documents to contain references to costs additional to freight. Will these costs be reasonable or, on the contrary, will we have to finance operations with abusive costs?

7. Sub-articles (i) and (j) of article 28 allow insurance documents to contain exclusion clauses and franchises or excess deductibles. The question is whether we will see reasonable exclusion clauses and franchises, or will we have to finance operations having little cover?

8. Article 30 focuses on tolerances, and considers the tolerances for amount, quantity and unit prices to be independent of one another. In a case where there is a tolerance in the amount, but the credit says nothing about tolerance in quantities or unit prices, should we interpret this to mean that the same proportion of tolerance is to be applied to the other two categories or should we consider that they have no tolerances?

9. Article 35, second paragraph, says the issuing or confirming bank should reimburse the nominated bank if the latter certifies that the presentation is complying, even when the documents have been lost. This is excellent protection for the beneficiary that has duly complied. But will the applicant be unprotected, and not be able to dispatch the goods without documents?

10. Will the confusion between transferable and back-to-back credits continue? Unfortunately, there are still many practitioners who consider a back-to-back credit to be a single operation when, in fact, there are two different credits. Sub-article 38(g) is quite clear in stating that not all amendments are valid in a transferable credit, which can change it into a back-to-back, making two credits instead of one.

It may be that bankers coming from different cultures will raise other issues that lead to different interpretations. That can happen even in this case, where hundreds of experts have cooperated, and the decision of the Banking Commission to approve UCP 600 was a unanimous one.

Now we will see the answers to all of these questions in our daily practice. Long live UCP 600!

Xavier Fornt
Internacional Advisor, Caixa Catalunya - Barcelona
E-mail: xavier.fornt@caixacatalunya.es