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Copyright © International Chamber of Commerce (ICC). All rights reserved. ( Source of the document: ICC Digital Library )
Starting in the 1980s, the late Bernard Spencer Wheble, Chairman Emeritus of the Commission on Banking Technique and Practice of the International Chamber of Commerce, to whom this book is dedicated, often prophesized the coming of the “paperless credit”. He predicted that many traditional documents would cease to exist. He also noted problems related to the determination of the time and place of presentation and issues of “originality” that needed to be addressed. Mr Wheble believed that the future of the letter of credit industry was bound up with the “paperless credit”, indicated that the time for this process was literally “just around the corner”, and set in motion many of the thought processes that have emerged in the eUCP. His essays spell out these ideas, see e.g. Bernard S. Wheble, Documentary Credits and UCP 500; Bankers’ Letter of Credit Transactions: The Work of the International Chamber of Commerce; and Delivery and Payment, collected in the 20th Century Survey of Letter of Credit Law and Practice (Institute of International Banking Law & Practice 2002). Unfortunately, Mr Wheble did not live to see his vision realized. However, those who knew him well believe that he would have been proud of the eUCP.
With the availability of the eUCP on 1 April 2002, the evolution of the commercial letter of credit into a fully electronic payment system has begun. While systems and processes need to be developed and refined to take full advantage of the presentation of electronic records under letters of credit, it is only a matter of time until the vast majority of presentations will be made electronically.
Trade payment systems and finance have gone through many stages during the past hundred years. Letters of credit have been issued electronically since the advent of telegrams and cables. However, the most accelerated changes have taken place during the past 25 years with the advent of SWIFT, the computerization of letter of credit processing systems, and customer initiation of L/C issuance. Although traders have sought to increase the speed of their transactions over the years, little could be done until the presentation process was electrified. The implementation of eUCP is only the first stop in this process. Electronic presentations are in the infancy stage of what is sure to become a totally electronic process. To fully appreciate many of the concepts of the eUCP, it is necessary to begin by visualizing its inevitable end, and work backwards from there. Its inevitable end is automated compliance checking allowing the letter of credit process to be “straight through processed”.
Formal steps to create the eUCP began in May 2000 when the ICC Banking Commission authorized the creation of a Working Group to formulate rules for the evolution from paper-based credits to electronic credits. The Working Group was comprised of knowledgeable letter of credit practitioners, attorneys, and representatives of the transport industry.
Working Group meetings began in July 2000 in London and were followed by meetings in Orlando, Istanbul, Toronto and Paris in addition to numerous conference calls. Over this period, the Working Group produced three drafts for comment and received more than 200 sets of suggestions.
The eUCP was approved in November 2001 at the ICC Banking Commission meeting in Frankfurt, Germany and became effective at 24:00 hours Greenwich Mean Time on 31 March 2002.
Since the practice in this area is rapidly developing, it was a difficult task for the Working Group to create functional rules that articulate these practices. After a thoughtful review, the Working Group initially determined that its principal task was to focus on the electronic presentation of documents under the UCP and not issuance. This decision was based on the fact that letters of credit had for many years been issued electronically and the conclusion was that there was little that could be done from the perspective of issuance to move further into the electronic world. Indeed, there was concern that further rules might encumber present practices of electronic issuance.
Secondly, the Working Group decided that the final product had to be technology neutral. It was concluded that the rules themselves should not be based on present processes that were tied to specific technologies. By avoiding technology-specific terminology or solutions, future practices could emerge in many different forms using new technologies within the framework of the rules. Nonetheless, future changes in technology will impact the eUCP, making inevitable revision of its rules to accommodate maturing practices and new technologies.
In drafting the eUCP, the Working Group debated the merits of creating rules that would apply when electronic records alone were presented. It concluded that rules for solely electronic presentations were premature. In order to accommodate current practice and technology and the continuing evolution toward total electronic presentation, the eUCP introduces the concept of a mixed presentation. Under the eUCP, presentations can be either all electronic records or a mixture of some paper documents and some electronic records. In order to accommodate the presentation of paper documents and electronic records, it was necessary to create some rules that add additional requirements for paper documents presented under an eUCP credit beyond the requirements that one would normally find under a paper-based UCP credit. These additional requirements are highlighted in the text of this commentary.
The relationship of these rules to the UCP also had to be considered. At an early stage, it was decided that the eUCP would be a supplement to UCP 500 and, as such, not operate as a stand-alone set of rules. Should UCP 500 be revised, it will be necessary to consider whether to incorporate the option of electronic presentation into the UCP or continue to have separate rules to accommodate these practices.
To some in the L/C community, the eUCP may appear to be untested theory, having yet to face the trial of real practice. In fact, however, the concepts behind these rules are grounded in principles of L/C practice, the limited existing practice surrounding present electronic presentations, and widely accepted principles of eCommerce. As a result, the rules of the eUCP are not untried theory but reflect letter of credit practice. The principles on which the eUCP has been based are the underlying principles in the UCP and standard practice currently existing for eCommerce transactions. Its roots are in the principles of standard banking practice grounded in the history and evolution of the UCP. In interpreting the eUCP, it is important that it be read in conjunction with UCP 500 and in light of standard international letter of credit practice contained both within the UCP and the eUCP. The eUCP reflects the evolving practices of banks in this field, with its roots in practices that developed from the use of telefax, telex and SWIFT. The eUCP draws on the principles of electronic issuance and analogizes from practice in the paper world in equivalent situations for electronic presentations.
As would be expected, most of these principles are reflected in the definitions contained in eUCP Article e3. The definitions provide a necessary tool for understanding and using the Articles of the eUCP and are a useful starting point for its concepts. The eUCP, however, is more than a new set of definitions to be read in conjunction with the UCP. It contains substantive rules that change underlying concepts of UCP 500. These new provisions will also change the processes and procedures that banks have been accustomed to using under the UCP.
In addition to its use with the traditional commercial credit, the eUCP can be used with standby credits subject to UCP 500 as provided in UCP 500 Article 1 (Application of UCP) which states in part that its rules “…shall apply to all Documentary Credits (including to the extent to which they may be applicable, Standby Letter(s) of Credit ).…” It should be noted, however, that the rules drafted especially for standbys, the International Standby Practices (ISP98), already contain both normal rules and optional definitions for electronic presentations.
The integrity of the letter of credit is grounded in the independence of the credit from the underlying transaction and its corollary that banks deal only in documents and not in goods or services. Many of the changes related to the presentation of electronic records may appear to impinge on these principles. An instance is the use by the examining bank of a hyperlink to get to an electronic record that is not directly presented to the bank, but must be examined for compliance with the credit. Another instance would be examining data contained in messages, or message envelopes regarding the transmission path, or authentication or dates for sending and receipt. While at first glance these examples may appear to impact the independence of the transaction, the examination is only of this data and not the realities that they represent and does not impact the independence of the credit. Specific examples and discussion of these issues are discussed in the treatment of individual Articles of the eUCP.
Although the eUCP is based on the time-tested principles of the UCP and letter of credit practice, the presentation of electronic records raises new considerations for the safety and soundness of letter of credit practice. Whenever new processes are introduced into an operations environment, however, it is necessary to look closely at the new risks created. Banks will need to undertake a thorough analysis of the changes in operational risk related to the presentation of electronic records and create new procedures and risk guidelines for these practices.
Letter of credit practitioners have long been concerned with fraudulent transactions and presentations under credits. Fraud in the documents has been a concern but not an overwhelming problem for the industry. With the additional requirements for authentication of electronic records and today’s technology related to digital signatures and message authentication, these issues should diminish. It would be far more difficult to have fraud in specific electronic records presented under an eUCP credit than in today’s paper world, provided that adequate authentication practices are used. That is not to say that fraud can be eliminated from credit transactions simply by the use of electronic presentation, but only that the possibilities for fraud become more limited
On the whole, letter of credit law is more capable of adaptation to electronic presentation of documents than is commercial law in general. For more than a century, the electronic issuance of letters of credit and amendments has been accepted without remark. Such undertakings have been given the same effect as if they were in a paper format and the authentication accepted as would be a signature.
Although there is no known case law on the electronic issuance of L/Cs, such issuance was contemplated in the only modern statutory codification of letter of credit law, the first version of Article 5 (Letters of Credit) of the US Uniform Commercial Code, issued in 1952. Section 5-106(2) (a) provided that “[a] telegram may be a sufficient signed writing if it identifies its sender by an authorized authentication which may be in code.” UCC § 5-106(2)(a) (1952 Official Version).
Article 6(g) of the United Nations Convention on Independent Guarantees and Standby Letters of Credit, a more recent and international exercise, expressly encompasses electronic presentation of documents as well as electronic issuance. It defines “document” to include “a communication made in a form that provides a complete record thereof”.
In addition, it must be noted that electronic presentation of documents is not new, particularly with respect to standbys. It is not uncommon for standbys to specify that the required documents may be sent by telefax, email, or SWIFT. Indeed, Rule 4.06 of the International Standby Practices (ISP98) allows electronic presentation unless expressly prohibited by the standby where the beneficiary is a financial institution. Only a demand is required, and the presentation is made through a closed secure communications network such as SWIFT. There have been no reported cases that raise any issues regarding the acceptability of such presentations.
Electronic presentation would certainly be encompassed by rules recently implemented in the US to facilitate electronic banking, such as 12 C.F.R § 7.1016, which permits a national bank to do anything electronically it could do in a paper mode. It is probable that most other bank regulators would take a similar position.
Despite this promethean attitude, it remains possible for judicial decisions to complicate electronification of letters of credit. For example, one of the more troubling aspects of the disappointing decision in Banco Santander SA v. Banque Paribas, [2000] 1 All ER (Comm) 766 [England], reprinted at 2001 Annual Survey of Letter of Credit Law & Practice, 194, was its effective conclusion that a deferred payment undertaking was not the equivalent of a bankers’ acceptance in providing a nominated bank that acted in good faith with immunity to a defence against beneficiary fraud. Such a decision will increase significantly the risk of engaging in trade finance for electronic L/Cs.
Nonetheless and with the exception of such aberrations, letter of credit law in general has deferred to the intent of the parties and to internationally accepted practices and the rules reflecting them. It has also given wide latitude to the intent of the parties and allowed them to define the scope of the conditions on which their undertakings are conditioned. As a result, a credit requiring or permitting electronic presentation of documents is likely to be given effect. Although the eUCP is new, it is based on internationally accepted principles and practices of letters of credit and electronic commerce. It may be expected that it will be accorded equal deference in situations where the undertaking is issued subject to it.
While letter of credit law is likely to be generally hospitable to electronic presentations, there has been widespread concern that commercial law in general may be less conducive to electronic agreements. As a result, there has been reform and enactment of statutory provisions embracing electronic commerce. Many of these provisions provide an overlay on general commercial law, addressing legal requirements that there be a “writing” or a “signature” or equivalent terms or concepts.
While these developments are, on the whole, not restrictive, they can cause confusion where, as is almost always the case, they contain statutory definitions of terms related to eCommerce. In drafting the eUCP, every effort was used to adopt terminology and definitions that were not innovative but that followed the concepts developed in eCommerce jurisprudence. However, in some cases, differences have emerged either because there is no consistency in usage between statutes or because letter of credit practice introduced issues not otherwise addressed in eCommerce law.
Many of these definitions used in eCommerce statutes are intended to override implied or express restrictions in other laws. As a result, the same term (e.g. “electronic record”) may be defined in both the eUCP and local law and the definitions may differ. Such a situation does not signify a conflict between the two provisions because they only relate to each respective meaning of the term in its text, but does require that any interpretation keep the two meanings in perspective.
A more serious difficulty arises where the law imposes affirmative requirements that are greater than those that would otherwise be required by the eUCP or the terms and conditions of the credit. In such a situation, the bank may face the wrath of the beneficiary if it rejects based on a legal requirement contrary to the terms of the credit, and from the applicant if it seeks reimbursement based on a document that may be unenforceable under local law. In such a situation, the provision of UCP 500 sub-Article 18(d) (Disclaimer for Acts of Instructed Party), shifting the risk of compliance with laws other than those of the issuer, may be of some help but would not help in situations where the problems were created by the issuer’s own law. Such a possibility should be addressed in the reimbursement agreement or the bank’s general terms and conditions.
On the whole, there is no conflict between most eCommerce laws and the eUCP. The United Nations Commission on International Trade Law (UNCITRAL) Model Law on Electronic Commerce, which is the most influential statute, would not create any problems with respect to the eUCP. GAOR, 51st Sess., U.N. Res. 51/162 UNCITRAL (1996). A number of statutes have been based on it. See Canada, Uniform Electronic Commerce Act (1999); Columbia, Electronic Commerce Law 527; India, Electronic Commerce Act of 1998; Singapore, Electronic Transactions Act of 1998; US, Uniform Electronic Transactions Act (1999). A comprehensive list of countries following the Model Law is contained on the UNCITRAL website at http://www.uncitral.org/english/status-e.htm; See also Baker & McKenzie, E-Transaction Law Resources Legislation, Regulations and Policy – By Country (Visited July 29 2002) http://www.bmck.com/ecommerce/intlegis-t.htm. The only difficulty that has surfaced to date would relate to requirements for a greater degree of security with regard to signatures than is imposed by the eUCP or the credit. It is possible that some interpretations of the European Union Directive on a Community framework for electronic signatures (EU Directive 1999/93/EC December 1999) could result in the imposition of such a requirement, and any applicable statute enacted to give effect to this directive should be carefully scrutinized.
Listed below are some broad general categories of issues that should be considered in utilizing the eUCP. This list is not comprehensive and other matters may require attention.
As an applicant for an eUCP credit, there are a number of issues that must be considered. First, the determination to use a credit allowing presentation of electronic records must be made jointly with the beneficiary of the credit. The applicant must be sure that the beneficiary can present these electronic records in the format required and that this format is acceptable to the banks.
The applicant must also be able to fulfil any requirements for authentication of electronic records or digital signatures and determine if its bank is prepared to issue a credit subject to eUCP and in formats that are mutually compatible. The applicant should review any changes relating to eUCP credits in the reimbursement agreement with the issuing bank. It is essential to ascertain that the electronic records required are sufficient to clear any merchandise and acceptable to the customs authorities.
From the perspective of the issuing bank there are a number of aspects that need consideration when preparing to issue eUCP credits and process presentations of electronic records.
The issuer may wish to consider a specific strategy for approaching its customers as to their interest and preparedness for eUCP credits. If customers are prepared, the bank must insure that it has proper reimbursement agreements in place that cover such topics as formats for electronic records, authentication and digital signatures in addition to those areas addressed by the normal reimbursement agreements for paper-based credits.
Legal counsel must be actively involved in the transition to electronic presentations under eUCP credits. Counsel should review the customer reimbursement agreements to ensure that areas such as formats for electronic records, authentication and digital signature requirements are met. They should be well versed in any local eCommerce law that would impact issuance of an eUCP credit.
A large part of the transition to acceptance of eUCP credits will be the involvement of the technology area of the bank. It must provide the systems capability to deal with all aspects of eUCP credits. It must ensure that internal systems can process the formats required, authenticate messages and electronic signatures. A complete analysis of system needs must be conducted, as well as a complete project plan for implementation of system changes to accommodate electronic presentations.
Once the legal and systems work has been completed, all staff that will issue or process presentations under eUCP credits must be properly trained in the eUCP as well as system changes related to the processing of electronic records.
A complete review of risk management policies should be completed to account for changes in processing practices for eUCP credits as well as any additional risks deemed relevant to transaction processing.
Depending on its role in an eUCP credit, a nominated bank (advisor, confirmer, other nominated bank) should ensure it is prepared to act in the nominated capacity under an eUCP credit. In particular, it is important to review the credit to ensure that the specified format and any authentication or digital signature requirements are feasible.
Before agreeing to accept a credit subject to the eUCP, the beneficiary should agree with the applicant in the underlying credit regarding the electronic records to be submitted and the format for these records. They should be ones that the beneficiary can produce in the requisite format. The beneficiary should also ensure that the issuing bank can accept the electronic records in the specified format. The beneficiary should assure itself that any requirements for authentication of electronic records or digital signatures can be fulfilled. If it is not able to comply with any requirement for presentation of electronic records, the beneficiary should immediately take steps to have a credit amended.
• Dan Taylor (US), President, International Financial Services Association
• René Müller (Switzerland), Director, Trade Finance, Credit Suisse
• Prof. James E. Byrne (US), George Mason University School of Law, Director, Institute of International Banking Law & Practice
• William I. Cameron (Canada), Partner, Owen Consulting
• Kim Chalmer (Denmark), General Manager, E-Commerce, Maersk (A.P. Møller)
• Gabriel Chami (Lebanon), Legal & Technical Adviser, Banque Audi SAL
• Neil J. Chantry (UK), Manager Policy and Procedures, Group Trade Services, HSBC Holdings plc
• Gary Collyer (UK), Head of Product Management, Global Trade & Advisory, ABN AMRO Bank
• Dr Carlo Di Ninni (Italy), Manager, Documentary Credit Department, Associazione Bancaria Italiana
• Johannes M. Fritzen (Germany), President, Volkswagen Transport GMBH & Co. OHG
• Winfried Holzwarth (Germany), Counsel, Deutsche Bank AG—Frankfurt
• Ms Nicole Keller (Germany), Product Manager, International Business, Dresdner Bank AG— Frankfurt
• Ms Laurence Kooy (France), International Legal Affairs, Head of Global Trade Services, BNP Paribas
• Fredrik Lundberg (Sweden), Senior Trade Finance Adviser, Nordea Bank Sverige AB— Stockholm
• Avv. Salvatore Maccarone (Italy), Professor of Law, Maccarone & Associati Studio Legale
• Vincent M. Maulella (US), International Banking Advisor, US Council for International Business
• David Meynell (UK), Vice President, Trade Services, Deutsche Bank
• Paul Miserez (Belgium), Head of Trade Finance Standards, SWIFT
• Vincent O’Brien (Ireland), Documentary Credit Specialist, Obrico Ltd
• Bhaskar Yashwant Olkar (India), Chief Executive, Foreign Exchange Dealers’ Association of India
• Arthur O. Thomas (US), former Global Manager of Trade & Regulatory Affairs, APL
Dan Taylor and Jim Byrne
28 June 2002