Article

by Frank Reynolds and Donald Smith

When we wrote the "Reports from the UCP seminars" article (DCInsight April-June 07), our seminars were the first exposure to UCP 600 for most of the attendees.

The seminars continue with one important difference: many recent attendees have already been exposed to the new UCP through mini-seminars or "webinars", or by reading copies of the rules themselves. The result was more questions, often probing into a greater level of detail than was true in the first round.

Lacking a large number of UCP 600 credits or the new additions to the corpus of international standard banking practice, we can only speculate as to what some of the answers may be. However, the questions themselves we've been asked and the logic behind them is interesting. This article deals only with those we've received, and these may reflect Frank Reynolds' background in trade rather than banking.

Questions

The reference to "international standard banking practice" itself provided a number of questions. Attendees understood the difference between it and the International Standard Banking Practice publication, but questioned how non-bankers are supposed to keep up with what they consider to be a moving target. One attendee even referred to it as a sort of "wild card" that banks can play at their convenience. Users of credits cannot be expected to devote anywhere near the same level of dedication to evolutions in banking practice as bankers - or can they? There was also some concern that as post-UCP 600 international standard banking practice develops, some of the obvious benefits to the revision may be modified so as to become useless.

"Too good to be true" came up often enough to mention. Frequent beneficiaries in particular showed some scepticism about whether all the UCP 600 benefits will really show up if issuing banks simply exclude them from their credits. Some of the articles mentioned are sub-articles 14(d), (e) and (j) (which were of particular concern), as well as 7(c) and 35, which are discussed below.

Excluded articles

Sub-article 7(c) is being deleted by issuing banks in some parts of the world, and some US bankers have said that they decline to advise credits with this specific exclusion. This refusal to advise makes sense if the advising bank is concerned that it may be asked to negotiate the documents, as this sub-article contains the issuing bank's obligation to reimburse the nominated bank.

Further concern was expressed over the exclusion of Article 35 concerning lost documents. Beneficiaries believe that they have satisfied their obligations when they have shipped in accordance with the contract and presented credit-conforming documents to a nominated bank - only to discover that some issuing banks apparently want to place the responsibility on them for documents lost in transit - surely a risk outside of the beneficiary's control!

There were also questions concerning nomination now that we have clear guidance on where to present documents. At what point should a nominated bank declare whether it is prepared to act under its nomination? Or is it even necessary to say? If this information is not available soon after a credit is received, how is a beneficiary to determine whether an unconfirmed credit is good enough as is? Another question took this a step further by mentioning the possibility of acceptance credits calling for drafts on the nominated bank. A related question was whether a nominated bank may decide not to act under its nomination after it has agreed to do so.

Transport documents

Transport documents brought more questions, particularly ones concerning article 19. The first was why the name change when the title "Transport Document Covering at Least Two Different Modes of Transport" is a perfect definition of a multimodal transport document. Its new name and placement as the first transport document article in the rules must have increased the interest level, as a number of people asked the following question about a point also found in UCP 500. Given multimodal transportation, why is "shipped on board" included as an option in part (ii)? Is it often the case that a multimodal transport movement will begin with vessel loading? Is the idea to make a documentary conversion from multimodal to port-to-port? If this is the intent, why not simply require a bill of lading or sea waybill, since on board notations are clearly required for these documents. Imposing an on board notation requirement works against the very nature of multimodal transport, which is movement from/to places other than ports and airports. Since multimodal documents for transport including a marine transport leg can be constructed in either negotiable or non-negotiable form, the security of negotiable documentation should not be an issue.

Given the growing awareness of Incoterms in the United States, a number of attendees question why UCP 600 contains no mention of these shipment and delivery terms. The obvious answer is that not all transactions are covered by Incoterms. This situation is likely to continue, as Incoterms, by their very nature, apply only to sales of tangible portable goods. However, the Incoterm definitions could have been useful in differentiating between shipment contracts incorporating the old marine-only terms particularly appropriate for on board documentation (FOB, CFR, CIF) and those commonly used where multimodal transport is envisioned (FCA, CPT, CIP).

Conclusion

UCP 600 has been referred to both as the "death-knell of the L/C" as well as the "litigation lawyers' full-employment act." Your writers have no doubt that this is being said, but do not agree with it. We've heard this sort of "Monday morning quarterbacking" before. It usually comes from people who participated and failed to get a pet change included in the revision, or more likely from people who didn't participate, either because they couldn't be bothered or simply weren't invited. As battle-scarred (or battle-scared) users, these writers think 600 is a dramatic improvement in eliminating mythical discrepancies.

Of course, issuers who exclude articles without rewriting the principles contained therein risk becoming the victims of the "law of unintended consequences."

Frank Reynolds is President of International Projects, Inc. in Ohio (US). His e-mail is fjr24@aol.com. Donald Smith is Vice President, Client Services at Norman Technologies in North Carolina (US). His e-mail is don.smith@normantech.com