An irrevocable letter of credit was issued in December 2006 for USD 200,000 in favour of a beneficiary in China and advised by a Chinese bank in China for the account of Edward Trading LLC for the purchase of finished garments to be shipped by air from China to the US. A draft was to be drawn at sight on the issuing bank with an expiry on 21 January 2007 when accompanied by the following documents:

- signed commercial invoice indicating FOB China airport;

- original signed purchase order;

- packing list;

- inspection certificate issued and signed by applicant;

- applicant's statement indicating that fabrics that are supplied by applicant have been utilized and paid;

- air waybill consigned to and notified applicant with full address;

- shipping authorization.

Special conditions:

- Advising bank is nominated as negotiating bank.

- Documents must be presented within 21 days after the shipment date.

This credit was subject to UCP 500.

The beneficiary shipped the goods on 31 December 2006 and presented the documents to the negotiating bank in early February 2007. We were not aware the documents had been presented, and the beneficiary frequently claimed our non-payment for goods received. It was charged that we had been notified by the negotiating bank in China of all discrepancies and that we never replied. It was also said that if we had accepted the discrepancies and paid, the beneficiary might have had an opportunity to act. In addition, we were not aware that the beneficiary had borrowed against our letter of credit and experienced financial difficulty at that time, leading to a bankruptcy proceeding. However, the negotiating bank has held the documents since February 2007 without notifying us about any discrepancies.

The discrepancies were as follows:

- L/C has expired;

- Applicant's statement not presented;

- Quantity on shipping authorization differs from that of actual shipment.

Because the beneficiary owed us for the fabric proceeds, for which we supplied the fabrics for USD 118,000 to enable the production of finished garments, we have not issued the applicant's statement and sent it to the beneficiary indicating that it has been paid.

UCP 500 Article 13 b) states: "The Issuing Bank, the Confirming Bank, if any, or a Nominated Bank acting on their behalf, shall each have their 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."

Although we did not know, prior to the presentation of the documents, of any borrowing and contractual agreement between the negotiating bank and the beneficiary, it is apparent that the negotiating bank was holding the documents without notifying the issuing bank and the applicant that the documents were presented with discrepancies.

Our view is that the negotiating bank/ nominated bank should not have held the documents. The negotiating bank should have notified us of any discrepancies through the issuing bank, even if the beneficiary may have been in bankruptcy proceedings at that time. Is this matter beyond the scope of UCP 500? Questions remain as to why the negotiating bank held the documents and what constitutes the standard for examination of documents for the negotiating bank in China. There is a long way to go before Chinese banks follow international banking practice on examination of documents.

Simon Jian
Chief Executive Officer And President
Edward Trading Company


The new UCP 600 has 39 articles, down from 49 in UCP 500. That is all to the good, but I believe one more article, which I shall call the missing article 40, should have been added. In my view, it should have read something like this:

Article 40

Terms and conditions of a credit should be as simple as possible;

a. A credit should avoid asking for unnecessary documents. Documents not directly related to a shipment are considered to be unnecessary.

b. A credit should not require legalization/ certification of documents.

c. A credit should not require drafts.

d. When a credit calls for original documents, copies should not follow.

The introduction to the UCP 600 states: "...70% of documents presented under letters of credit were being rejected on first presentation. This obviously had, and continues to have, a negative effect... and, if unchecked, could have serious implications for maintaining or increasing its market share...".

But whose fault is it?

Among my papers I have found one, unfortunately without the name of the author, titled "Why discrepancies?" The paper contains comments from different L/C experts who suggest several reasons for discrepancies. All of them blame the exporters. One of the experts, Dan Reiste, however, does indicate that he has also come across L/Cs that say too much, ask for too much and are written in poorly worded language...

Reinhard Längerich in his book Documentary Credits in Practice also blames the beneficiaries. Being an exporter himself, Laurence A.J. Bacon, in his article "Who speaks for the exporter", in DCInsight Vol. 12 No. 3, to could have been expected to attack the problem of complicated L/Cs, but surprisingly there was not a single word.

Of course, it is useful for exporters/ importers to know the UCP rules, but are they really required to know them? Shouldn't they rely on their banks, that are specialized in this instrument and are well paid for providing trade finance services, just as defendants and plaintiffs rely on lawyers?

Not all export businesses operate on a regular basis. It is not "once an exporter, always an exporter". Many small businesses export only once in a while. Some of them have not even heard of this animal called "letters of credit", let alone the rules that govern them, and they usually lack adequate knowledge for handling L/Cs. Why not just let them concentrate on what they do best, namely providing goods and services, and assist them to enter the international arena without looking at them as if they were adversaries?

It is sad to see or hear (as I often do) how exporters are terrified by lengthy and complicated credits, usually in four or five pages, requiring a draft that has hardly any function, ten or more different documents, unnecessary certificates, legalizations and verifications and a great deal of "musts" and "must nots". In fact, exporters would be hard put to understand L/C terms and conditions of that kind, let alone prepare documents having no discrepancies.

I have been working with letter of credit for 20 years, and it's clear that L/Cs issued in 2007 do not differ from those issued in 1987 in terms of complex and lengthy requirements. The wordings and templates used 20 years ago are still in force. Clearly, conditions in credits do not correspond with a 21st century business climate and advanced technology. The only way we can bring down the scary rate of 70 per cent is to "persuade" banks to issue simple L/Cs.

It seems that some banks are content to make beneficiaries suffer by issuing L/Cs asking for too many different documents, most of them having nothing to do with underlying contracts. It is na to believe that documents presented under difficult credits will comply even if they are prepared by familiar-with-therules personnel.

At the other end of the scale, we see simple credits asking for "an invoice" and "a transport document". Result: no discrepancies, no disputes, no fuss!

Does legalization of documents make them more genuine? Do certificates issued by carriers concerning the age of a vessel or whether it sails on a regular basis have anything to do with the safe arrival of goods? This is not the 18th century. Vessels today have much higher safety standards than they had in the past.

Banks tend to forget that they are just intermediates even if L/Cs bear their names. Why not issue a simple credit: payment against an invoice and a shipping document? All other terms and conditions should be, and in fact are, often worked out between the trading partners in their sale contracts.

UCP 500 was successful in discouraging banks from issuing credits available by a draft drawn on the applicant, because banks find themselves in the spotlight and exposed if they don't follow rules. Sub-article 5(a)(i) of UCP 500 deals with excessive detail in the credit. But it is not at all specific, which is perhaps one reason issuing banks have not heeded it sufficiently so far. Moreover, this sub-article was regretfully lost in transit between UCP 500 and UCP 600.

I am aware that some conditions banks incorporate in their credits are dictated by local regulations, and some of them are politically motivated. But I believe most of the requirements are at least one generation old and could easily been removed. Banks need to go through their routines concerning L/C opening extensively with one purpose: to create simple and sensible terms and conditions.

I am not sure how this problem of complexity can be resolved. But I strongly believe ICC can play a decisive role due to its ties with business communities and close relationships with other international organizations such as the WTO and WCO. It has the means of reaching the banks to make them change their attitudes to match 21st century needs and to vigorously pursue this objective until even inflexible banks finally relent.

Hossein Moezzi
Certified Documentary Credit Specialist
Nordea Bank AB (publ), Gothenburg

1. Published by Nordea Plc, 2001

United Arab Emirates

Like other developed markets, banks in the UAE are also preparing themselves for the change to UCP 600. This time there seems to be a greater emphasis on training, and most UAE banks have either arranged in-house training or organized workshops conducted by renowned documentary credit trainers from across the globe. "Up Skill 600", the online training initiative from ICC in collaboration with Coastline Solutions, is also a very popular choice with local banks.

Only time will tell how successful the new rules are, but the general feeling among bankers is encouraging. The initial response seems to be positive. Most trade practitioners are optimistic that the new rules are likely to reduce L/C disputes and promote a better understanding of the rules.

Having said that, the new rules are not without their critics, and some of the articles are already attracting debate/ criticism from practitioners. Some of the problem areas for me are contained in articles 14 and 35. I will discuss them briefly to highlight my concerns.

There are two aspects of article 14 that bother me - first is the apparent conflict between sub-articles 14(d) and 14(h). Sub-article 14(d) states that "Data in a document, need not be identical, but must not conflict with, data in that document, any other stipulated document or the credit." The last part of this article relating to "data in the credit" is slightly confusing, for when a credit states the origin of goods to be "China" without stipulating a document to evidence compliance, should the document checker consider this as "data in the credit" or disregard it as if not stated as provided in sub article 14(h)? I assume that, the non-documentary condition having been disregarded, presentation of a document indicating the origin of goods other than "China" would be acceptable.

This is the same example cited by the ICC Banking Commission in Position Paper no.3 to clarify the question of a non-documentary condition. I understand that the Position Papers are no longer valid under UCP 600, but I can also argue that UCP 600 sub-article 14(h) has borrowed the language of UCP 500 sub-article 13(c), so that the explanation in the Position Paper appears to be retained.

In my view, UCP 600 sub-article 14(b), read in conjunction with provisions of article 15, is likely to create a similar ambiguity as the infamous reference to "reasonable time" under UCP 500 sub-article 13(b). Whilst sub-article 14(b) provides a maximum of five banking days following the day of presentation to determine compliance, the provisions of article 15 suggest that the nominated bank must honour/negotiate and forward the documents to the issuing/confirming bank "when compliance" is determined. This for me is a gray area. It is impossible to quantify a standard period for determining compliance, which means that it would again come down to the volume or complexity of each document as a determining factor.

Second, another article that may have a significant impact on practice is the reinforcement of ICC Banking Commission Opinion R 548 (TA/566) in UCP 600 article 35, which affords protection to the nominated bank in respect of loss of documents in transit. Many banks are already contemplating excluding this article from their credits once UCP 600 is implemented. Hopefully, sanity will prevail, and instead of excluding the article altogether, banks will come up with a reasonable solution, for instance an alternate clause that would make it mandatory for the nominated bank to provide the issuing bank with a copy of documents to determine compliance.

I personally believe that UCP 600 are good rules, but I also feel that the advances in the use of the Internet and easy access to content on the web is likely to bring UCP 600 under far more scrutiny than its predecessor. There is likely to be a microscopic examination of each article for language and content. This can be counterproductive, since too much debate and explanation can result in distorting the meanings of the articles and lead to misconceptions and disputes.

Khalid Iftikhar
Assistant Vice President
Overseas Trade Operations, Mashreq Bank