Article

Should B/Ls have been excluded from UCP 600 article 17?

by Saku Heiskanen

Why are shipping documents such as bills of lading (B/Ls) rarely used as security against non-payment, particularly when the relative transaction is financed by a bank? This article attempts to answer that question by examining sub-article 20(b) of UCP 500, which establishes the foundation for the concept of the originality of documents. It further argues that new UCP 600 does not adequately address the problem arising from UCP 500 sub-article 20(b).

Banks, especially in developed countries, are more likely to look to the creditworthiness of the parties with whom they deal and other security arrangements they may have with those parties rather than to title documents such as B/Ls to be presented under the credit. The reasons for this may be practical rather than legal - the goods being shipped may not be of great security value to the bank due to its limited ability to resell them and the inherent risks involved in their carriage. Also, as a result of continuing advancement in document production technology, it is increasingly difficult to distinguish between a copy and an original document. The loose drafting of sub-article 20(b) of UCP 500 may have contributed to the reduced importance of B/Ls as security documents. Even though the practical difficulties are obvious, this should not be a reason for undermining the security value of the B/L. Problems arising from sub-article 20(b) of UCP 500 should have been addressed more clearly in UCP 600.

Sub-article 20(b) of UCP 500 is confusing, to say the least, when read together with UCP 500 sub-article 23(a)(iv). Sub-article 23(a)(iv) requires the sole original bill of lading or, if issued in more than one original, the full set to be tendered. At the same time, subarticle 20(b) enables production of additional originals. This is an odd outcome, bearing in mind that in most countries B/Ls are documents of title and are offered to banks as security for letters of credit. Nevertheless, sub-article 20(b) of UCP 500 is clear in its literal meaning.

UCP 600

In UCP 600, articles 20 and 23 of UCP 500 became articles 17 and 20, and the wording of these articles has been amended to some degree. However, the outcome did not change materially - sub-article 17(c)(iii) still states: "Unless a document indicates otherwise, a bank will also accept a document as original if it ... states that it is original, unless the statement appears not to apply to the document." The wording of the new sub-article 17 acknowledges that some documents marked as "Original" may not be originals, but it still requires banks to treat any documents, including copies of B/Ls which are marked as "Original", as original documents when there is no reason to doubt that the marking refers to some other document.

Shipping documents, and in particular B/Ls, would be more attractive as security if sub-article 20(a)(iv) of UCP 600 took precedence over article 17. In other words, article 17 should not be applicable to B/Ls, and only a full set of "genuine" original B/Ls should be a "good tender". This would also clarify different interpretations concerning the originality of documents.

Loophole

A carrier will surrender the goods when a single genuine original B/L is presented to it for the delivery of the goods. This delivery will defeat any security interest involving the B/L and the goods underlying the B/L. Therefore, for it to be feasible for a bank to accept a B/L as security or partial security when issuing an L/C, the issuing bank needs to know exactly against what documents the bank can or must pay and take steps to ensure that its security interest in the goods underlying the B/L will not be defeated. An applicant for a credit or a bank must therefore specify: a) in how many originals must the B/L be tendered; and b) that, in order to obtain payment, a complete set of original B/Ls will be tendered. The ICC Banking Commission has stated that a B/L must clearly indicate the exact number of originals issued. Consequently, some banks will not accept a B/L unless it is numbered with the total number of original B/Ls issued, i.e., 1/3, 2/3, 3/3 etc. This is necessary to ensure that all the originals issued have been accounted for. But do these steps really help?

Consider a scenario in which a B/L states that three original bills were issued when the first bill tendered to the bank is a genuine original and the second and the third are just copies stamped as "Original". For the purpose of this example, let us assume that the copies appear to be originals and that they therefore satisfy the requirements of UCP 600 article 17. What options does the bank's document checker have in this situation? The tendered documents are neither discrepant nor inconsistent, and they are in compliance with the requirements set out in the L/C and UCP 600. But the document checker cannot know for sure whether all genuine originals have been tendered or whether these are genuine originals or carbon copies marked as "Original" in transit. Hence, the risk remains that the security for the L/C, the shipped goods, will be demanded by a third party in possession of a "missing" genuine original B/L. The carrier would be obliged to surrender the goods against a genuine original B/L, and the bank's security would be defeated. Nevertheless, the bank would remain obligated to pay under the L/C, because the tender fulfils the requirements set by the L/C and UCP 500 as well as UCP 600, i.e., "full set, 3/3 of bills of lading to be tendered".

Originality

Several problems have arisen in the past concerning what is considered to be an original document under an L/C and the necessity, if any, for such a document to be marked as original. Sub-articles 20(b) and 23(a)(iv) of UCP 500 do not allow photocopies or telefaxed or carbon copies of original documents to be tendered. But they do allow documents to be produced in this way as long as the documents are authenticated and marked as original.

The ICC Banking Commission's Decision, "The determination of an 'Original' document ...", etc. states that banks are required to examine documents presented under an L/C to determine, among other things, whether on their face they appear to be original. Banks treat as original any document bearing an apparently original signature, mark, stamp, or label of the issuer of the document, unless the document itself indicates that it is not an original. This means that banks would be obliged to treat a clear photocopy of a B/L which is stamped as "Original" as an original document, provided, of course, that a stamped copy of the B/L seems on its face to be an apparent original as required by sub-articles 20(b) of UCP 500 or 17(c) of UCP 600. This is supported by the Glencore case ([1996] Lloyd's Rep 135), in which the ruling was based on the court's reading of the language of UCP 500 sub-article 20(b) and not the ISBP. If this was not the intention, then article 17 of UCP 600 should have been modified to state that it is not applicable to B/Ls.

Sets

It is in merchants' and not in the shipowners' interest to issue B/Ls in sets because merchants require negotiable documentation. Shipowners are merely obliged under the Hague-Visby Rules, Article III (3), to issue B/Ls. B/Ls are usually issued in sets of three originals, although exceptions exist. In the early days of international trade, when shipping times were longer and mail services less reliable, issuing a set of three arguably provided protection against loss. This is hardly the case anymore.

An important issue from the bank's point of view is what the bank has agreed with the buyer in the credit application. If a bank has accepted a B/L as security or as partial security for the credit, then only a full set of genuine B/Ls will provide an acceptable security interest for the bank. Under the current regulatory situation, difficulties arise when the appearance of the document tendered to the bank is such that the bank cannot determine conclusively whether such document is a copy or an original. Unlike carriers, who know exactly what their shipping documents look like, document checkers have no way of verifying (i) who stamped the copy as original, (ii) whether the B/L is forged or not and, most importantly, (iii) whether there are more genuine originals outstanding. Therefore, it would clearly be in the bank's interest that only one genuine original B/L be issued for which the holder can demand the goods.

As discussed above, banks nowadays demand the entire set as a precaution against fraud. Therefore, a buyer, if properly advised, will ask for a provision in the sale contract giving him the entire set of B/Ls or risk being in breach if the bank rejects a tender of less than the entire set. If banks would, instead of demanding a full set of B/Ls, encourage merchants and carriers to use a single original B/L, the market could move away from the practice of dealing with multiple original B/Ls. This should ultimately lead to an outcome in which carriers will issue only one original B/L, which would reduce considerably the risk of fraud arising from the loophole opened up by sub-article 20(b) of UCP 500.

Conclusion

It is not entirely clear whether article 17 of UCP 600 should be applicable to B/Ls. A plain reading of the new UCP suggests that article 17 is applicable, because B/Ls are still not specifically excluded from the article. But in practice this makes little or no sense. So far, there have not been any cases concerning the originality of a B/L, but there are several cases concerning the originality of other documents.

Raymond Jack states in his book "Documentary Credits" (Third edition 2001, p. 200) that verification of originality will become increasingly difficult as document reproduction technology continues to improve and colour copying becomes commonplace. This appears to have happened already, which is why the Banking Commission should have reacted by clarifying in UCP 600 that article 17 in UCP 600 is not applicable when a credit calls for a B/L.

Saku Heiskanen's email is sakuheiskanen@hotmail.com

Ambiguities in the new UCP

by Pavel Andrle

At the beginning of the 21st century, the documentary credit remains an important payment instrument, with the UCP governing virtually all letters of credit. It is therefore no surprise that the process of the revision of the rules, started by the ICC Banking Commission in spring 2003, was closely followed by all involved parties. The final text of the revised UCP 600 was approved by the Banking Commission at its meeting last October by a unanimous vote. The successful vote clearly shows that all ICC national committees, even those that may have been opposed to some of its new provisions or wording, greatly appreciated the new revision in its entirety.

There may be some shortcomings in the new revision. Some say one of them was the fact that some significant provisions were not included in the rules - for example, the long-term issue of the linkage between documents and the credit or the lack of a default forum and jurisdiction under a credit.

Interpretation and implementation

I agree there are still some outstanding issues to be finalized and sorted out. However, I would like to focus on other important issues, namely those concerning interpretation and implementation.

One of the main reasons for the revision was the request for more clarity in the rules. This has been partly achieved by the definitions in article 2 and interpretations in article 3. On the other hand, based on discussions during my seminars and with colleagues, I also believe there is a real danger of misunderstandings and misinterpretations. By revising the rules we have only completed the first half of the job. The remaining part is even more important - the correct and consistent (at least not conflicting) interpretation of the rules and their implementation in practice. I cite some examples below.

Complying presentation

Article 2 of UCP 600 introduces the definition of "complying presentation" and says that a "Complying presentation means a presentation that is in accordance with the terms and conditions of the credit, the applicable provisions of these rules and international standard banking practice."

International standard banking practice in this context does not mean the ICC publication containing the ISBP. It means international standard banking practice in the broader sense, which definitely includes, but is not limited to, the ISBP publication.

Since the introduction of ISBP in 2003, there has been a confusing relationship between this document and the UCP. Many bankers were of the opinion that banks could refuse documents by claiming a discrepancy based solely on the credit terms and conditions and UCP 500, not the ISBP. Many others thought quite the opposite. They said that because ISBP was clearly an ICC Banking Commission official document on international standard banking practice, presented documents must also obviously comply with these practices.

With UCP 600, I believe this confusion should be now be overcome. Nevertheless, the question arises, what is the international standard banking practice that is not reflected in the ISBP? It seems difficult to give a clear and comprehensive answer to this question. In my opinion, there will only be exceptional cases where standard practice is not included in the ISBP. One is well advised not to rely lightly on his own understanding as to what standard banking practice is since, in most cases, this may be only regional or domestic practice. It would be difficult to prove that something is standard practice unless it is at least reflected in another ICC Banking Commission document (Opinions, Decisions, etc.) or in a DOCDEX Decision.

Five banking days rule

UCP 600 sub-article 14(b) says: "A nominated bank acting on its nomination, a confirming bank, if any, and the issuing bank shall each have a maximum of five banking days following the day of presentation to determine if a presentation is complying. This period is not curtailed or otherwise affected by the occurrence on or after the date of presentation of any expiry date or last day for presentation."

This five banking day rule replaces the UCP 500 wording of "a reasonable time, not to exceed seven banking days". It is well known that the UCP 500 wording was incorrectly interpreted by many banks to read just "seven banking days" until some of them suffered a penalty for that interpretation in court cases. Now many fear that the phrase "a maximum of five banking days" might be interpreted to mean a reasonable time not to exceed five banking days.

I am of the view that the new rule stating a maximum of five banking days means exactly what it says, i.e., banks have, in any particular case, up to five banking days - in other words, they can opt to exercise the full five banking days for examination of the documents. The intention behind revising this provision was to replace the troublesome "reasonable time rule". Clear interpretation from the ICC Banking Commission is needed.

Place of receipt/port of loading

UCP 500 article 23 a (ii) states: "If the bill of lading indicates a place of receipt or taking in charge different from the port of loading, the on board notation must also include the port of loading stipulated in the Credit and the name of the vessel on which the goods have been loaded, even if they have been loaded on the vessel named in the bill of lading. This provision also applies whenever loading on board the vessel is indicated by pre-printed wording on the bill of lading."

I am sure many were surprised that this clause is not part of the revised article 20 of UCP 600. What is the exact impact of the change? Is there any difference in the way we should now examine (and accept or refuse) bills of lading? Does it mean that if the bill of lading shows a different place of receipt from the port of loading, it is to be refused? Or does it mean that the B/L is to be accepted even without the need for a dated on board notation, which also includes the port of loading stipulated in the credit and the name of the vessel on which the goods have been loaded? And is this the case even if the goods have been loaded on the vessel named in the bill of lading?

One L/C expert said that even in this case a notation as above would be needed because of the general wording in UCP 600 sub-article 20(a)(ii) stipulating "A bill of lading, however named, must appear to ... indicate that the goods have been shipped on board a named vessel at the port of loading stated in the credit." If that is the case, the UCP 500 wording implicitly remains when a place of receipt of the goods differs from the port of loading, even though this is not expressly stated in UCP 600. I am concerned that this point could cause considerable confusion in the marketplace unless it is expressly clarified.

For these and other reasons, I hope the Commentary on UCP 600 will serve to explain the ambiguities remaining in the new rules.

Pavel Andrle is Secretary, ICC Czech Republic Banking Commission and a trade finance trainer and consultant. His email is pa@cmail.cz

1. Banks are well advised not to always take the full fiive days but to speed up the examination process. If and when they fiind documents to be compliant, they (the issuing and confiirming banks) must honour.