Article

by Brooke Wunnicke

Welcome to the UCP 600! I look forward to 1 July 2007 when the new rules become effective. Let me tell you why my welcome is so warm and enthusiastic.

In 1987, I had been practising law for 40 years in Wyoming and Colorado, two states in the western United States' Rocky Mountain region. Although I had much experience in business law, I had never been involved with letters of credit until 1987, when my daughter was involved with them on an almost daily basis as treasury officer of an oil and gas company. My reaction was - and still is - that a letter of credit is a very efficient payment device for international trade. I then began studying letters of credit: their history, increasing use and various types. The result was that my daughter and I wrote a basic book, Standby Letters of Credit, the first edition published in 1989 and distributed by the ICC, now in its third edition, Standby and Commercial Letters of Credit that we supplement annually. But I get ahead of my story.

History

My study of the history of letters of credit revealed that they had been used in the ancient Western world and in China. As the centuries passed and the Industrial Revolution fostered international trade, the English "law merchant" (dubbed "lex mercatoria" by Latin scholars) was developed - not by lawyers but by the people engaged in international business transactions. The objective was an effective yet simple method of ensuring payment in international trade. And I believe that those non-lawyers achieved that objective very well by their letters of credit.

When we undertook the first edition of our letter of credit book, the 1983 UCP 400 was in effect. In the United States, Article 5, "Letters of Credit", of the Uniform Commercial Code, was also in effect. In the transactions with which my daughter was involved and in my legal research, the letters of credit were almost always made "Subject to the UCP 400". In the United States, that notice meant that the UCP 400, not UCC Article 5, governed the transaction. I found the UCP 400 well written and easy to understand. Both our book and its annual Supplements included summaries of legal cases, with the facts, the court's rulings, and the court's explanation of its rulings. Although some years had relatively few cases, we believed, and still do, in the advice of the Roman philosopher Plautus (ca. 100 B.C.): "Tis better to profit by a horrible example than to be one."

UCP 500

On 1 January 1994, the 1993 UCP 500 became effective, and the use of lawyers' language, unkindly called "legalese", was apparent. The result was also apparent: an increase in the amount of litigation involving letters of credit; increase in the use of letter of credit experts to testify at trial, with disagreement between the experts for the opposing parties to the lawsuit not infrequent and judicial interpretations of words and phrases in the UCP 500. Also, there was frequent disagreement between courts as to the interpretation of the rules.

Some lawyers were concerned whether the UCP 500 applied also to standby letters of credit or only to commercial letters of credit. We believed it obvious that the UCP 500 was applicable also to standbys - and wrote a Special Report (our only soft cover book) - entitled "UCP 500 and Standby Letters of Credit" (also distributed by ICC), in which we pointed out that waiver of several of its designated provisions inapplicable to the particular type of standby involved would ensure applicability of the UCP 500.

I recall a prominent figure in the letter of credit world, a non-lawyer now deceased, stating that too much lawyer involvement in preparing the UCP 500 was the root of the increase in problems relating to its use. Because I cannot now obtain permission to quote him, I, a practising lawyer for 60 years, boldly state: "I agree. Too much lawyer intervention in the UCP 500 undermined the efficiency of the letter of credit."

Other rules and conventions

And the UCP 500 was only the start of more rules for letters of credit. The rules multiplied like rabbits: International Standby Practices 1998 (ISP98), the UNCITRAL Convention on Standbys and Independent Guarantees and a more complex UCC Article 5. Add all these to the UCP 500 and I submit that those merchants of long ago who thought up the idea of letters of credit would not recognize their creation. A simple and efficient method of payment? The reader can answer this question.

Now, I hopefully say: "Welcome to UCP 600." I note with pleasure some basic changes. Here are a few of the changes that I believe support my welcome.

- The reduction in the number of articles from 49 to 39 is an important step toward simplification of the rules. With due respect to my colleagues in the legal profession, I submit that reduction in the length of a document is not typical of lawyers' writing. For many years, I was an Adjunct Professor of Law, teaching evening courses in oil and gas law and real property law. Every class I taught always asked the same question: "How do I write like a lawyer?" And then I would teach my ABC's of legal writing: accuracy, brevity and clarity. And always, "brevity" shocked the students. But I firmly restate: the UCP 600's reduction from 49 to 39 articles is an improvement.

- Definitions! A separate article for definitions, article 2, is a welcome addition, as are some of the new terms included. For example, the definition of "negotiation" is enlarged and improved from the term's definition in UCP 500's sub-article 10(b)(ii). In the third edition of our book, Standby and Commercial Letters of Credit, we tried to help by distinguishing from each other a "freely negotiable negotiation credit", a "restricted negotiation credit" and a negotiation credit as described in UCP 500, sub-article 9(a)(iv). But the term "negotiation" has long needed the formal clarification by the straightforward definition in UCP 600 article 2.

- UCP 600 sub-article 14(b) is one of my favourite new provisions: the replacement of "reasonable time" with the specific "five banking days" after the day of presentation to examine and determine if the presentation is complying. "Reasonable" is a notorious weasel word in the law. [Note: for readers not familiar with the term "weasel word", Webster's English Dictionary defines it as "a word used in order to evade or retreat from a direct forthright statement or position".] "Reasonable" is used frequently in law; for example, the standard to determining tort liability is whether the defendant acted as a "reasonably prudent person". Numerous contract cases involved litigation about whether one of the parties complied with some provision referring to "reasonable time". I believe that no single English word has caused more mischief in litigation than "reasonable".

- "Original documents." This troublesome term has its own separate article, article 17,"Original Documents and Copies", in UCP 600. Although I have no first-hand knowledge of the proceedings, my guess is that article 17 received much discussion and redrafting. "Original documents" has been a thorny term in letter of credit law. For example, I remember a storm of controversy caused by the decision in the 1996 English case of Glencore International A.G. v. Bank of China, [1 Lloyd's Rep. 135 (C.A.Civ. App. 1996)], which was perceived as requiring a document presented as an original to be marked or stamped "Original" - even though it had an original signature. I predict that article 17 will need some "tweaking", but until then shall relish the improvement that the UCP 600 provides in defining "original documents".

- Other pleasing improvements are in the UCP 600, for example, the provisions relating to amendments and to deferred payment credits. And probably one of the most notable examples of improvement is the substantial redrafting of the transport and insurance provisions - even listing these changes needs a separate article to be fair and useful.

A final note to the reader: I trust that you also have decided that the UCP 600 is better than the UCP 500 and will join me in saying: "Welcome to the UCP 600!"

Brooke Wunnicke of Denver, Colorado in the US, has been a practising lawyer for more than 60 years and is the author of several books on standbys, commercial L/Cs and professional ethics. Her email is wunnickeb@hallevans.com