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Gary Collyer is Technical Adviser to the ICC Banking Commission and was the Chair of the Drafting Group on UCP 600.

DCI You have given dozens of seminars all over the world on UCP 600. Is it your impression that there has been a relatively smooth transition from 500 to 600, or are the new rules meeting considerable resistance?

Collyer There appear to be one or two countries where UCP 500 letters of credit are still predominantly issued. However, on the whole, the response has been pretty positive, and most people seem to have grasped UCP 600. I have not heard of any major issues relating to the application or the interpretation of the new rules. And when you look at some of the Opinions that the Banking Commission considered in October of last year, and those for which we have already tabled for the April meeting this year, there is really nothing significant. In fact, we could probably argue that three-quarters of the queries we have received would have equally been questions that could have been asked under UCP 500.

DCI What are the two or three issues that provoke the most questions in your seminars?

Collyer The inclusion in the second paragraph in article 35 regarding loss of documents in transit is something that has come up rather regularly. A number of banks have been seen to exclude that provision for whatever reason. If banks look to exclude this provision, like any other, they need to look at it from the perspective of the nominated bank or the confirming bank and put themselves in their shoes in relation to that particular transaction. Would they be happy to handle the transaction as a nominated bank or as a confirming bank confirming with that provision in article 35 removed?

I am not sure if they have really understood what they are removing or why they are removing it. The language in UCP 600 now reflects the point of view and the Commission Opinion given under UCP 500. Although the wording was absent in UCP 500, the same position would have prevailed. We have not created something different.

I keep getting questions in relation to whether this paragraph applies when the beneficiary sends the documents directly to an issuing bank. What happens, they also ask, if the documents are discrepant? The language of article 35 is quite clear and says that if the documents are presented to a nominated bank and the nominated bank determines they comply, and the nominated bank forwards the documents to the issuing bank or confirming bank and they are lost in transit, then the issuing bank or the confirming bank is responsible for honour or negotiation. It should be clear that this does not relate to any sending of discrepant documents or any sending of documents by a beneficiary directly to an issuing bank.

The other issue that arises relates to the authorization for pre-payment or purchase of deferred payment undertakings or accepted drafts. It is a well known fact that the inclusion of this rule came about due to the outcome of the court case back in the 90s, Banco Santander vs Banque Paribas. The English court took the view that under UCP 500 article 9 the obligation of an issuing bank or confirming bank under a credit available by deferred payment was to pay at maturity.

As a result of that court case and a number of others that followed around the world, various countries were looking for a specific provision to be inserted in UCP 600 to allow a "discount" to occur. Similarly, it must be said, there were some countries that did not want this to be addressed.

At present, the banks that were looking for that provision to be in the UCP tend to be relaxed and happy with it, although a few have indicated that their willingness to pre-pay under a deferred payment undertaking will be on a caseby- case basis and will not apply for every beneficiary. The banks that were not looking for that provision to appear in UCP 600 are predominantly those that are excluding the rule from their letters of credit and therefore effectively providing the position the beneficiary had under UCP 500, i.e., if the nominated bank is requested to provide a pre-payment under a deferred payment undertaking that it has incurred, then it is clearly a matter for that nominated bank to determine whether it is willing to proceed without the support of the rule in UCP 600 sub-article 12 (b).

DCI Is this question of exclusions a bigger issue now than it was when UCP 500 came out?

Collyer When you look at the exclusions, the one thing that strikes you is that most of them relate to concepts and positions that were in UCP 500. Maybe the new style of wording has caused banks to reconsider their views of the UCP language. Part of the drafting process of UCP 600 was, hopefully, to make the language easier to understand and, more importantly, for the countries that translated the UCP to be able to translate it more easily into their own language.

We have seen exclusions of subarticle 14 (b). This sub-article has three parts: one, which banks are responsible for examination, i.e., a nominated bank acting on its nomination, a confirming bank, if any, and an issuing bank; two, the period within which they have to examine the documents, i.e., a maximum of five banking days following the day of presentation; and three, the provision that the period of five banking days is not affected by the occurrence of any upcoming event such as expiry or latest presentation date. If banks exclude this provision, are they really looking to exclude the whole thing? Because if they are, the basic questions will now be which banks must examine, what is the maximum period and what happens if an event occurs within that particular period? It may well be the case that the bank only wanted to remove or modify one of the provisions. But by excluding sub-article 14 (b), you take out the whole rule.

Another is the exclusion of sub-article 14 (f ). If this rule is excluded, what is the basis for examination of documents when no issuer or required data content is stated?

The whole issue of exclusions is compounded by the fact that it is a practice by a large number of banks, when they receive a letter of credit and have not been asked to confirm it, not to carry out a complete review of the credit before forwarding it to the beneficiary. Therefore, any exclusions that an issuing bank may make in the credit may not be apparent until very late in the process, i.e., when the documents are presented. By that time, it may well be too late to rectify or clarify the issue(s). This may adversely affect the beneficiary, because the nominated bank could say: "Hold on, with this exclusion, we do not know whether we can accept a, b or c", and therefore it will not do anything. This can have a detrimental effect on the letter of credit as a viable settlement means and may also have an effect on the beneficiary being able to receive financing.

DCI On that point, if a provision is excluded without stating the conditions for the exclusion, does this automatically mean that the opposite of the exclusion then applies?

Collyer No. It is important to note that in most cases, if you exclude a rule of the UCP, you have to put something back. In other words, you have to insert language in the letter of credit to fill the void left by the exclusion of the UCP provision. In our last Banking Commission meeting, we were discussing a query concerning exclusion clauses that had been seen in four or five sets of circumstances, and the overwhelming response was that the Opinion should clearly indicate that exclusions should not be necessary in every event and, where applied, should be kept to a minimum.

If some articles are excluded without providing a clear statement of what is required, in some cases the issuing bank will place itself and the applicant in a situation of severe risk, as ultimately they are the ones that face the risk of any ambiguity in the credit. If an issuing bank excludes one or more rules, it can be open to a nominated bank or the beneficiary making their own assumptions as to what is acceptable, and the issuing bank may not have grounds for a refusal by subsequently saying that when it deleted the clause, it actually meant something different, but this requirement was not clearly articulated in its credit.

DCI Another sub-article that has been excluded from time to time is 14 (l). Why would anyone want to exclude that?

Collyer This goes back to a lot of questions we had under UCP 500, and they still arise under UCP 600. What is meant by "house bills of lading not acceptable", "house air waybills not acceptable" or "freight forwarder bills of lading not acceptable"? In most cases, the intention is that a bank does not wish to accept a transport document issued on the letterhead of the freight forwarder, even when it is signed by the freight forwarder as agent of the carrier or as a carrier, but you do not necessarily get to that position with the above language.

I have emphasized that by excluding sub-article 14 (l), you are not completely excluding the issuance of a document issued on the letterhead of the freight forwarder. A freight forwarder, and in particular members of FIATA, invariably issue their own transport documents

and will sign them as carrier. Excluding 14 (l) will not prohibit a document issued by a freight forwarder where it signs as carrier, because then the document becomes a carrier document and is not covered by any exclusion of 14 (l).

If banks are looking to exclude documents issued on the letterhead of a freight forwarder, they often need to go beyond just the simple exclusion of 14 (l). Banks need to be more explicit in the wording in their letter of credit, in particular in relation to whether freight forwarder bills of lading are acceptable/ not acceptable, whether house air waybills are acceptable/not acceptable, etc., and what they actually intend by the use of such language. ICC Opinions in the past have pointed this out, as well as ISBP paragraphs 72, 95 and 138.

DCI Let us talk about definitions. With regard to the definition of "Complying presentation", several of our writers have questioned its reference to "international standard banking practice" and the intent of the rules to make this broader than simply ICC's ISBP publication. And they ask how they can determine what international standard banking practice is if they cannot refer to something specific.

Collyer The ISBP publication number 681 now contains something like 185 paragraphs, down from 200 paragraphs in the previous version. I think everyone will fully appreciate that there are far more processes that could be classified as international standard banking practice. These were not tabled for one reason or another, or they did not receive full support for inclusion when we originally created the publication.

A lot of what is in publication number 681 reflects what is in the Banking Commission Opinions, and all of the Opinions we have issued equally reflect international standard banking practice, because the Commission has approved the answer as a response to a particular issue.

There are also issues that have been considered by the DOCDEX panels. These Decisions are equally international standard banking practice.

I think we must recognize that there are regional practices that become international standard banking practices due to the cross-border nature of those particular transactions. For example, there is considerable trade between India and Bangladesh and India and Russia. The manner in which these transactions are handled is not necessarily peculiar to India and Bangladesh or India and Russia, but these practices may not be considered to be international standard banking practice by every country. However, they are considered to be such between those countries. In my view, they are equally international practices as anything in the ISBP publication. This is one of the best ways I can explain, as one example, why in UCP 600 article 2 we did not limit the reference to "international standard banking practice" only to publication 681.

When publication 681 was issued, it was only an update to reflect what had happened as a result of the UCP 600 revision process. When we get around to actually revising the ISBP, I believe we should consider a full-blown revision with agreement globally on what all of these practices are and how we should consider the approach to a particular document or a particular type of transaction. At the moment, the ISBP covers drafts, invoices, transport documents, insurance documents and certificates of origin. Most letters of credit contain far more documents than these. For the ISBP to be a proper tool it must include documents such as inspection certificates, health/fumigation/phytosanitary certificates, packing lists, forwarding agents certificates of receipt, etc.

After a comprehensive ISBP revision, we may have the opportunity to say that international standard banking practice constitutes essentially what is in the ISBP publication. At the moment, we do not have that.

DCI On the question of negotiation, do people seem to think that the word "purchase" is an improvement over "giving of value" or is there still confusion there?

Collyer I have not come across anyone who has raised an issue regarding purchase. I believe people appreciate that within one definition we have clarified three positions regarding negotiation. In the first, we refer to how the draft is to be drawn in relation to a negotiation letter of credit, if there is a need to have one, i.e., we have spelled out that it has to be drawn on a bank other than the nominated bank, i.e., the issuing bank; in the second, we have described how negotiation affects the beneficiary, that it can be by advancing or by agreeing to advance funds; and third, what is negotiation as far as the nominated bank is concerned, namely to use its funds to make settlement to the beneficiary on or before the banking day on which reimbursement is due to it.

If people have posed a question, it has concerned more how to apply agreements to advance funds and whether the agreement to advance is just to advance on the due date or the expected date of reimbursement.

Agreeing to advance funds is also agreeing to advance funds on a particular date that may fall between the date the documents have been found to be compliant and the date reimbursement is due. It could also be, as we have explained in a previous Opinion, a percentage of the value of the draft. It need not be 100 per cent of the draft amount. In summary, there is scope in the language concerning agreeing to advance funds that allows the bank and the beneficiary to reach an agreement in relation to what, how and when negotiation is going to occur.

DCI With regard to sub-article 20 (a) (i) that says the bill of lading should "indicate" the name of the carrier: if, for example, a transport company is named on the letterhead without the word "carrier" and an agent signs "as agent for the carrier", would this be acceptable?

Collyer It would not if there is no indication on the face of the document as to the name of the carrier. It does not matter even if the name on the face is a transport company. This naming in itself does not provide a clear indication of the name of the carrier. In fact, in paragraph 94 of ISBP we made it clear that original bills of lading must be signed in the form described in UCP 600 subarticle 20 (a) (i) and indicate the name of the carrier "identified as the carrier" to further emphasize the fact that the mere inclusion of the name of a company in the top right-hand corner was not sufficient for a bank to determine that it is the carrier. This stance goes back to the content of Position Paper No.4 that was issued under UCP 500.

DCI Finally, looking ahead several years, is UCP 600 likely to be the last traditional UCP and will it be replaced by something dealing with electronic presentations?

Collyer That is the million dollar question, because in 2002 when we developed the eUCP, we said it was necessary because there was a desire to move to electronic presentations. Here we are in 2008 with minimal transactions being handled subject to the eUCP.

I believe the next five years will be critical. We have seen the development of the SWIFT Trade Services Utility, which was established so that banks can obtain a footprint in the open account space and the electronic matching of data.

A number of banks are actively using the service today. From November of this year, the utility will include a facility for an undertaking to be added, i.e., you can add a bank payment obligation to the underlying transaction between buyer and seller so that the bank will pay on the determination of matching electronic data. This moves us closer to the possibility of an electronic letter of credit concept, and therefore there is scope that in a few years' time, we could see a transaction akin to a letter of credit passing through this kind of service, and therefore the eUCP may come into its own.

It is likely to be a number of years before we can handle all the data for every form of document electronically. We have to recognize that today there are a considerable number of documents that have to be certified by chambers of commerce, legalized by embassies and/or issued by third parties who may not be suitably positioned to provide this kind of information on an electronic basis. I believe there is still scope for probably one more UCP in its current form as a predominantly paper-based set of rules. After that, the majority of the UCP may well be focused on electronic transactions with the minority on paper. But first there has to be a concerted effort on the part of banks to move into the electronic environment. At the moment I do not see that.