The ICC Uniform Customs and Practice for Documentary Credits ('UCP') was first published in 1933 and has been followed by five revisions. The latest, which came into effect on 1 January 1994, is commonly known as UCP500.

During the course of almost 70 years, the international trading community has relied upon the courts of the world to arbitrate in letter of credit disputes. The letter of credit is a highly technical document which requires expert handling, not only as far as banks are concerned, but also the users of and contributors to such document, including (but not limited to) importers, exporters, shipping companies, insurance agencies, freight forwarders and inspection companies. It is apparent that when dealing with such disputes the courts generally had high regard for the expert testimony that would be given by practitioners. In reaching their decisions, judges were wont to rely on international practice in the handling of letters of credit, as well as on the wording of the respective letter of credit and the appropriate UCP provisions (if any). Nonetheless, some of these decisions have, to put it mildly, caused consternation in the banking and legal fields.

The autonomy of the letter of credit-i.e. that it is separate from the underlying contract, for instance of sale-is crucial to ensuring that it has a life ahead of it. Unfortunately, some bad or non-international banking practices have begun to lead to a growing number of disputes, most of which, it has to be said, do not come near a court or dispute resolution service. However, the time, effort and cost of resolving the issues in dispute continue to mount. This is exacerbated by letter of credit applicants being allowed the opportunity to interfere with (or influence) the obligations of issuing banks in determining whether or not documents comply.

The interpretational nature of letters of credit and a lack of understanding of certain UCP provisions have frequently led to confrontations between banks and between beneficiaries and banks. In recent years, the rejection rate for the first presentation of documents under letters of credit has been quoted as being between 70% and 85% depending on the publication read. In the course of his extensive experience as speaker for ICC, the writer has come across a few banks that have openly professed to a 100% rejection rate!

Recognizing the often long-drawn-out and costly nature of disputes that previously would have resulted in a court action, and the consequential additional costs of that course of action, ICC took the step of creating a 'half-way house': a dispute resolution service which, in the words of ICC Secretary General, Maria Livanos Cattaui, in her Foreword to the DOCDEX Rules, would be ICC's 'response to a clear call from the international banking community for a rapid, cost effective, expert-based [Page68:] dispute resolution mechanism for documentary credit practice, including bank-to-bank reimbursement issues'.

In conjunction with the International Centre for Expertise, the ICC Banking Commission entrusted the development of a common set of rules for dispute resolution to a working group made up of legal and documentary credit experts from all over the world. The result was the publication in October 1997 of ICC's Documentary Credit Dispute Resolution Expertise Rules (the 'DOCDEX Rules').2

With the clear 'goal' of creating rules capable of accelerating the settlement of disputes-disputes for which the next step would otherwise have been court proceedings-the working group devised a set of rules designed to enable a decision to be administered in a relatively short time, the binding force of which the parties were free to decide.

Salient features of the DOCDEX Rules

1. In any dispute there will be an initiator (the party that originally requests a DOCDEX decision) and a respondent, who will be the other party. Upon receiving a request from an initiator, accompanied by copies of all the corresponding paperwork, ICC will approach the respondent to enquire whether they wish to become involved in the DOCDEX process. If so, the respondent provides copies of their paperwork. If not, the DOCDEX process can still continue, but any decision will be worded to the effect that it has been made on the basis of paperwork provided by the initiator only. The initiator and the respondent declare whether they consider the decision to be binding or non-binding.

2. Upon receipt of a request for deliberation under the DOCDEX system, ICC will appoint three 'anonymous' experts to sit in adjudication-anonymous to the extent that their names would not be divulged to either the initiator or respondent in the dispute. The ICC Banking Commission has actively canvassed ICC National Committees for the enrolment of experts in a register. The current listing shows around 100 names of individuals from banking, commercial and legal backgrounds. The final decision of the experts is passed to the Technical Adviser to the ICC Banking Commission for approval. This ensures continuity of response in line with existing ICC opinions that are given by the Banking Commission on a semi-annual basis.3

3. Decisions will be given, in writing, to the initiator and the respondent within 30 days following the receipt of all the necessary correspondence that will allow the appointed experts to make their decision.

4. The decisions, which will be issued by the ICC International Centre for Expertise, will be clearly worded, giving succinct reasons and stating whether they represent a unanimous or majority viewpoint.

5. The DOCDEX process is subject to a fee of US$ 5,000, which may rise to US$ 10,000 if the amount of the letter of credit exceeds US$ 100,000.

6. ICC retains the right to publish the text of the issue and the decision determining it, taking care to ensure that the names of the parties involved are protected, together with any related information such as countries or goods. A number of cases have indeed been reported in ICC's quarterly publication Documentary Credits Insight. [Page69:]

Statistics

In the three years since the introduction of the DOCDEX Rules, 17 cases have been reviewed and decisions issued:

1997 1 case

1998 5 cases

1999 9 cases

2000 3 cases (to date)

Although encouraging (at least up to 2000), these figures may suggest that parties are 'sitting back' and taking stock of the decisions before resorting to the service for their own purposes. By this, I mean that initiators are looking for confidence in the decisions rendered. This will be achieved by the publication of previous cases, but only over a period of time. In the meantime, it is for ICC, and previous users of DOCDEX, to 'spread the word'. The writer has been advised of one reason why banks are not using the scheme: this is related to the cost. As previously mentioned, a basic fee of US$ 5,000 is charged, rising to US$ 10,000 depending upon the amount of the letter of credit. Although in most countries this would be seen, by any measure, to be a fairly reasonable cost, a large number of banks in Asia have expressed the view that, whilst they would consider using DOCDEX, the cost is too high. This may be an area that needs to be reviewed and possibly the charge made relative to the amount of paperwork involved rather than to the value of the letter of credit.

An analysis of the kinds of issues that have been the subject of DOCDEX cases shows there to be very little difference in the substance or content of those cases. As far as the type of letter of credit in dispute is concerned, one was a standby credit and the other 17 were commercial credits. The initiators in the total 18 DOCDEX requests break down as follows:

Applicant/beneficiary 7

Issuing bank 3

Confirming/negotiating bank 8

A brief review of some of the issues raised and decisions rendered

a) Standby letter of credit

As mentioned, only one case to date has involved a standby letter of credit. The issue turned on the content of UCP Article 13 and requirements under a letter of credit that went beyond the documents presented.

The case concerned the presentation of the 'supporting documents' under the demand for payment. One of these supporting documents, in which the issuing bank had observed discrepancies, was a CMR (Road Transport Document), which was to be signed by the addressee as indicated in the purchase order. The purchase order, however, was not part of the issuance of the letter of credit. The [Page70:] CMR, as presented to the negotiating bank, bore a signature purporting to be that of the addressee. Upon receipt of the documents, the issuing bank rejected the CMR on the basis that the signature did not match that in their records.

The decision of the DOCDEX panel of experts was that the role of the document checker is to look at the documents on their face for compliance with the letter of credit terms and conditions. A letter of credit should not incorporate conditions that require action outside its scope or that of UCP. Hence, this case raised the issue of the autonomy of the credit in relation to a sales contract or, as here, purchase order.

b) Commercial letters of credit

Issues: Whether the certificate of origin and the shipping company certificate had to show the production and expiry date; whether all documents should have shown the letter of credit number; whether the dates on the shipping certificate and the B/L were inconsistent.

Arguments

1. Production and expiry date not shown

The documentary credit did not specifically require the production and expiry dates to be mentioned in the certificate of origin and the shipping company certificate. The credit indicated: 'Production and Expiry Dates must be printed and/or labelled on each bag and must be shown on all relevant documents. Beneficiary's certificate in this respect is to be presented with the documents.' If the second sentence had not been added, it would have been a non-documentary condition. By adding this sentence, and thereby referring to a stipulated document, the condition could be said to be fulfilled by presenting the indicated document (beneficiary's certificate) in accordance with Article 5(b) of UCP 500.

If the issuing bank meant that every document should evidence the data, it should have stated 'all' rather than 'all relevant'.

2. L/C number not shown

The credit stipulated that the bill of lading and beneficiary's fax or telex must show the 'L/C number', but not that all documents should evidence the L/C number. Therefore, the issuing bank had no reason to refuse the documents on the ground of a missing L/C number on the shipping company certificate.

3. Shipping co. certificate indicating vessel sailed on 18 April instead of 14 April

The question was (i) whether there were different dates on the bill of lading and the shipping company certificate, and (ii) whether the documents were, in reality, inconsistent with each other within the meaning of Article 13(a). With regard to (i), the information 'SLD 18.04.1998' was translated by the issuing bank into 'sailing date', a phrase not found in the credit or in the bill of lading, which indicated an issuing date and a 'shipped on board' date. The phrase 'SLD' does not appear to be commonly and unequivocally known, even in the transport industry. It follows that, when examining documents, bankers must look at the credit, UCP 500 and the [Page71:] documents, but are not expected to have specific knowledge of goods or shipping and related abbreviations.

With regard to (ii), it is known to be common practice that goods are loaded on a ship over a period of several days, and that shipping companies (carriers) nevertheless issue all bills of lading on the same date of loading. The issuing and/or loaded on board date might not be the actual date of 'sailing'.

Decision

1. The credit did not require the certificate of origin to show production and expiry dates.

2. The credit did not require the shipping company certificate to show:

a. production and expiry dates,

b. L/C number.

3. There was no inconsistency between the shipping company certificate indicating 'SLD 18.04.1998' and the bill of lading with regard to the date of shipment (14 April 1998)

The documents presented conformed and the issuing bank had no reason for refusal.

Issues: Whether an invoice and packing list needed to display the term 'original'; whether a cargo receipt should show the place of delivery; validity of corrections on a cargo receipt; alleged inconsistencies in issuing bank's name in the credit; inconsistent telephone numbers on a credit; whether a refusal notice was sent in reasonable time; whether UCP deals with fraud.

Summary of representations

Bank B issued an irrevocable documentary credit no. LC123 ('credit') in favour of Company A for US$ 507,000, covering shipment of Company A's product. The credit was payable at sight and called for the following documents: drafts at sight on Bank B; signed commercial invoice in three copies; packing list in three copies; cargo receipt issued and signed by authorized person(s) of Company C certifying that the goods had been received in good order and condition upon trust for account and/or on behalf of a branch of Bank B, stating the value and quantity of goods and mentioning the credit number. Company A presented documents to Bank B through a presenting bank for payment. Bank B refused the documents claiming discrepancies, and the documents subsequently remained unpaid. Company A disputed the discrepancies raised and claimed that the documents were in compliance with the terms and conditions of the credit. They also claimed that Bank B's refusal notice was not sent in accordance with Articles 13(b) and 14(d)(i) of UCP 500. Bank B insisted on the validity of the discrepancies and claimed that the refusal notice was sent in accordance with the provisions of UCP 500. It further advised that the applicant refused to waive the discrepancies because neither Company C nor the [Page72:] applicant received the goods. The applicant also alleged that the two cargo receipts were forged.

The questions to be determined were as follows: (i) Were the documents presented by Company A discrepant under UCP 500? (ii) Was the refusal notice sent by Bank B in compliance with the provisions of Articles 13(b) and 14(d)(i) of UCP 500? (iii) Was Company A entitled to payment by Bank B under the credit?

(i) The alleged discrepancies raised by Bank B were as follows:

Invoice and packing list not marked 'original' as per Article 20(b)&(c) UCP 500

The invoice and packing list presented by Company A were printed on the original stationery of Company A and were also signed by them in handwriting. These documents were obvious originals and did not require any marking on their face as 'original'. This opinion was in line with the ICC Decision on the determination of an 'original' document in the context of Article 20(b) of UCP 500.4 Accordingly, the discrepancy raised by Bank B was not valid.

Cargo receipt not showing place of delivery

Compliance of the cargo receipt is to be determined by the terms and conditions of the credit and Article 21 of UCP 500. Article 21 states: 'When documents other than transport documents, insurance documents and commercial invoices are called for, the Credit should stipulate by whom such documents are to be issued and their wording or data content. If the Credit does not so stipulate, banks will accept such documents as presented, provided that their data content is not inconsistent with any other stipulated document presented.' There was no requirement in the credit for the cargo receipt to show a place of delivery. Accordingly, the discrepancy raised by Bank B was not valid.

The chop of Company C in cargo receipt showing deletion without authentication

The alleged discrepancy was not clear to the panel of experts on the basis of presentations from the initiator and the respondent. To be able to render a DOCDEX decision, the panel of experts requested the respondent to submit the original cargo receipts and clarify the discrepancy. Two original cargo receipts were submitted to the panel. It could not detect any deletion in the Company C chop on cargo receipt no. 123 dated 28 September 1998. Regarding cargo receipt no. 456 dated 26 September 1998, the panel noticed a trace of correction fluid after the word 'System' in the signing chop of Company C. Bank B alleged that the letter 's' after the word 'System' in the signing chop had been erased with correction fluid without authentication.

UCP lays down no requirements regarding corrections on documents. There is, however, an ICC Opinion dealing with corrections on transport documents (ICC Publication No. 469, R174). Since a cargo receipt is not a transport document, Opinion R174 could not be used to interpret the alleged discrepancy.

The name of the issuer of the cargo receipt, Company C, appeared to be consistent on the face of the document, i.e. at the top of the cargo receipt, in the signing chop and in the round chop authenticating the correction made to the letter of credit number. If in fact there was a letter 's' after the word 'System' in the signing chop which had been erased, the panel of experts found the signature of the General [Page73:] Manager to be sufficient authentication for the deletion. The discrepancy raised by Bank B was held not to be valid.

Cargo receipt showing alteration without bearing an initial on the correction chop

The credit required that the credit number be mentioned on the cargo receipt. The last digit of the credit number was amended from '7' to '8' with a round chop of Company C stamped beside the correction.

As mentioned above, UCP 500 is silent on how corrections are to be made on documents. ICC's opinion on the correction of transport documents, requiring authentication by a correction stamp as well as a signature or initial, could not be used to interpret the correction made on the cargo receipt, as this was not a transport document. It was clear, on the face of the cargo receipts, that the correction was made by the issuer, Company C. This was in line with the ICC Opinion in the Documentary Credits Insight newsletter, Vol. 4, No. 4, Autumn 1998, regarding corrections on documents issued by a party other than the beneficiary. As such, the discrepancy raised by Bank B was not valid.

Draft and invoice showing issuing bank's name different from L/C

The credit showed the name of the issuing bank variously as 'Bank B, City F, City F Branch', 'Bank B, City F Branch' and 'Bank B, F Branch'. The draft was made out in the name of Bank B. No inconsistency could be considered to exist between the word 'and' and '&'. Hence the panel of experts found the discrepancy raised by Bank B to be invalid. The invoice showed the name of the issuing bank as Bank B, City F (City F Branch), which was consistent with the description of the issuing bank's name in the credit. Accordingly, the discrepancy alleged by Bank B was not valid.

Beneficiary's telephone number in invoice different from L/C

The credit showed the beneficiary's telephone number as 123456, whereas the invoice showed beneficiary's telephone number as 123465. This was an obvious typographical error and the discrepancy raised by Bank B was therefore invalid.

(ii) Bank B was closed from October 1 to October 4, 1998 due to a public holiday and a weekend. Documents were therefore received by Bank B on October 5, 1998. Bank B examined the documents and found them to be discrepant and dispatched a refusal notice to the presenting bank on October 9, 1998, the 4th banking day following receipt of the documents.

UCP Article 13(b) states: 'The Issuing Bank, the Confirming Bank, if any, or a Nominated Bank acting on their behalf, shall each have a reasonable time, not to exceed seven banking days following the day of receipt of the documents, to examine the documents and determine whether to take up or refuse the documents and to inform the party from which it received the documents accordingly.'

UCP Article 14(d)(i) states: 'If the Issuing Bank and/or Confirming Bank, if any, or a Nominated Bank acting on their behalf, decides to refuse the documents, it must give notice to that effect by telecommunication or, if that is not possible, by other expeditious means, without delay but no later than the close of the seventh banking day following the day of receipt of the documents. . . .' [Page74:]

Article 13(b) and Article 14(d)(i) do not provide the issuing bank, confirming bank or the nominated bank with a period of seven banking days to examine the documents and to advise of rejection. Rather, each of these banks shall have a reasonable time to examine the documents and decide to take up or refuse them, subject to a maximum of seven banking days following receipt of the documents. The seven-banking-day rule is intended to be the maximum timeline, and it must not be interpreted to be the time allowed by UCP. Reasonable time must be determined according to the circumstances of each case. A very complex credit requiring examination of hundreds of documents could consume the entire seven-day period, whereas a simple statement of indebtedness under a standby credit may consume only a few hours of the examination period.

The panel of experts reviewed the circumstances of the presentation and the type of documents required and found that the refusal notice sent by Bank B was not in accordance with Article 13(b) and Article 14(d)(i).

(iii) Company A was entitled to payment by Bank B under the credit.

The fraud allegation raised by Bank B

UCP 500 has no provisions to deal with a fraud situation. Accordingly, any fraud allegations are outside the scope of a DOCDEX decision. In the dispute between Company A and Bank B, Bank B did not raise the fraud allegation when refusing the documents, which showed that forgery was not apparent to Bank B on the face of them.

Issues: Whether the issuing bank must pay when an inspection certificate, not under the control of the beneficiary, has not been presented; whether, when documents have been validly rejected, the issuing bank must nonetheless pay for loss and damages if the consignee was able to take part delivery of the merchandise.

Background

The credit, which covered merchandise to be shipped from Country U to Country I, was available with any bank in Country U by negotiation. Documents were thus to be presented to a bank in Country U, but the credit also stipulated that one document, an inspection certificate, was to be issued by the applicant and presented by the applicant directly to the issuing bank. The credit further called for one of the three originals of the bill of lading to be sent by the beneficiary to a bank in Country I for submission to the consignee in a city located in Country I. By a subsequent amendment, this one of the three originals was to be sent by the beneficiary directly to the consignee in this same city. The beneficiary presented the documents to a bank in Country U, which sent them on to the issuing bank. However, as the issuing bank was unable to obtain the inspection certificate, which should have been issued and presented by the applicant directly to the issuing bank, the issuing bank rejected the documents submitted by the beneficiary pursuant to UCP Article 14. The consignee succeeded in taking delivery of approximately one third of the goods shipped, before being stopped by a court order obtained by the beneficiary. [Page75:]

Arguments

The beneficiary maintained that the issuing bank was liable to pay in accordance with Article 9(a)(ii) UCP, as all stipulated documents within the beneficiary's control had been presented to the nominated bank and had been found by the nominated bank to comply with the terms and conditions of the credit. The issuing bank maintained that it was not liable to pay under the credit as one document-the inspection certificate, which was required to be issued by the applicant and presented by the applicant directly to the issuing bank-was never presented.

Majority decision by the experts

On the basis of the facts as presented, the issuing bank was not liable to pay under its credit. UCP and international standard banking practice require all documents stipulated in the credit to be presented and the terms and conditions of the credit to be complied with before the issuing bank's obligation under the credit comes into effect. Articles 2 and 9 spell this out:

Article 2, Meaning of Credit: This Article clearly indicates that all the obligations described in the Article are against 'stipulated document(s), provided that the terms and conditions of the credit are complied with'.

Article 9, Liability of Issuing and Confirming Banks: Article 9(a) clearly indicates that the undertaking of the issuing bank is subject to stipulated documents being presented. One of the stipulated documents in this credit was the inspection certificate, which the applicant had to present directly to the issuing bank. As this document was not presented, there was no obligation under the credit for payment to be effected, and the rejection of the documents by the issuing bank was valid under UCP and according to international standard banking practice.

As a further matter, the beneficiary claimed that the issuing bank-as an alternative to making payment under the credit-should pay for loss and damages incurred by the beneficiary because the consignee was able to take delivery of part of the merchandise shipped under the credit. On the basis of the provisions of UCP, the issuing bank had no obligation to pay for such loss.

Article 4, Documents v. Goods/Services/Performances states: 'In Credit operations all parties concerned deal with documents, and not with goods, services and/or other performances to which the documents may relate.'

The obligation of the issuing bank was only in respect of the credit as issued and amended and the stipulated documents presented thereunder. As the documents were validly rejected, the obligation did not arise and the issuing bank had no liability.

ICC has consistently been against the practice of issuing credits that include a requirement for presentation of documents not under the control of the beneficiary, as it weakens the value of the documentary credit as a guarantee for payment. It has warned beneficiaries against accepting to perform under documentary credits requiring documents to be presented not fully under their control. Warnings have also been made against accepting documentary credits that require transport documents to be issued and handled in a way that allows the consignee to take possession of the merchandise before the applicant has received the documents through the banking system. [Page76:]

Ending remarks

The decisions given to date in DOCDEX cases reflect sound judgement based on the correct interpretation of UCP and international standard banking practice. Use of DOCDEX should be considered by all concerned parties in letter of credit operations when all other forms of communication fail to arrive at a general consensus of opinion. In such operations disagreement between parties is by no means rare, so there is a place for a dispute resolution service that is fast, efficient and allows a fitting decision to be reached. Although the first step in the face of such disagreement is to create conditions conducive to consensus, parties to letter of credit operations should be aware of the existence of DOCDEX and encouraged to explore this less costly and better adapted alternative to court action.

1
The opinions expressed in this article are the personal views of its author and do not necessarily reflect those of Citibank NA or ICC.

2
ICC Publication No. 577, available free from the Secretariat of the ICC International Court of Arbitration, 38 Cours Albert 1er, 75008 Paris, France.

3
The ICC Banking Commission provides a service under which any individual, company or bank may write to ICC for an opinion on any aspect of interpretation or practice in respect of ICC rules. These opinions are drafted by the Technical Adviser and distributed to ICC National Committees for comment. At each semi-annual meeting of the Banking Commission, the opinions are discussed and agreement reached on the final response.