Article

by Mark Ford

All issues to do with UCP 600 will not surface for some time, and anyone who predicts with any certainty what challenges await bankers and other parties to transactions under the new rules and procedures for documentary credits runs the risk of offering a hostage to fortune. "It may take some months for the banks to comprehend the various provisions of UCP 600 from a practical perspective when shipping documents under UCP 600 credits start being presented and issues begin to emerge," says Pradeep Taneja, Chairman of the ICC Bahrain Trade Finance Forum and Vice President with Al Salam Bank, Bahrain, where he is setting up a trade finance division.

It would be unrealistic to expect that UCP 600 will completely clear up all confusion and prevent or resolve all disputes in the world of letters of credit. So it is probably prudent to consider what some of the issues and challenges under the new rules might be, even if some of the potential problems envisaged fail to materialize, and others appear out of the blue.

Early concerns

Bankers and traders canvassed by DCInsight generally felt that the lead time for UCP 600 was long enough for those who needed to learn about the new rules to do so. However, an early concern is that however well-grounded L/C professionals are in the theoretical knowledge of various provisions of UCP 600, troublesome problems will still arise.

One early concern is that in the coming months, banks, traders and other parties working with documentary credits will have to work both with UCP 500 for L/Cs issued until 30 June 2007 and UCP 600 for L/Cs issued after that. One banker suggested it would take until December 2007 to phase out UCP 500 and to phase in UCP 600.

Amongst bankers, UCP 600 seems to be viewed a definite improvement over UCP 500, as it should be being the most reviewed, debated and commented upon document in the history of the UCP. Taneja sees few problems ahead for customers and banks, but he cautions, "UCP 600 could spring surprises, some of them serious ones."

As the UCP 600 beds in with banks and customers, there are possibilities for them to misinterpret some of the new rules or attach unintended meanings to some of the new UCP 600 definitions.

Moreover, as people learn to use and interpret the new rules and procedures, in the near term the effectiveness of banks and customers making system changes might lead to problems. Banks have to implement UCP 600 by adapting their procedures, processes, templates and documentation, as well as upgrading their systems to the revised rules. If banks fail to do this, they run the risk of running into compliance, operational and legal problems.

Compliance

Some bankers are concerned about what constitutes a "complying presentation" under UCP 600 article 14. One pointed out that the new rules and procedures define a complying presentation as one that is not only in accordance with international standard banking practice, but also with the terms and conditions of credit and the "applicable" provisions of UCP 600. Issues may emerge from this definition in the context of the general principle of limited applicability that applies to standby credits "to the extent to which they may be applicable" as spelled out in article 1. This phraseology could lead to questions over what are the "applicable" as opposed to "non-applicable" provisions. Differences in interpretation over what is and is not applicable could lead to disputes, differences and disagreements, either genuine or spurious, the banker suggested.

"From the exporter's point of view, one of the most crucial steps is the presentation of the documents to the counters of the receiving bank under a L/C transaction, as this triggers the documentary compliance check cycle," says Roberto Bergami, Senior Lecturer at Victoria University's Practice of International Trade School of Applied Economics. He is also concerned about several aspects of article 14. These include its requirements for banks to follow "international standard banking practice", even though Bergami says it is unclear which international banking practices ought to apply. He is also concerned that the expression "on their face" in relation to the checking of documents for compliance has been retained in one article. "This expression has created concern because of its unclear meaning, not only in English, but also in other languages," he says.

Bergami adds that the cause of many discrepancies in L/Cs has not been alleviated, because the requirement for consistency of data among documents has been retained, regardless of whether these data are actually called for in the credit or not. "The doctrine of materiality does not appear to have been considered in UCP 600; rather the doctrine of strict compliance is still being followed," he says. This, he argues, still enables a bank to reject the documents and jeopardize the payment, regardless of how minor or irrelevant a small error may be.

Several other worries in non-bank constituencies can also be contemplated. These include concerns about the UCP 600 transport articles amongst freight forwarders, worried about the elimination of UCP 500 article 30, and concerns expressed by the cargo insurance industry about the wording of relevant articles that did not, amongst other things, consider the different liabilities notion under the "all risk" insurance cover policies.

What does it mean?

Bankers foresee that a Banking Commission Opinion may be sought concerning the terms "negotiation" and "honour" - terms UCP 600 attempts to define and differentiate to stem the frequent debates over the relationship between these terms under UCP 500.

Disputes could emerge over the meaning or interpretation of other words and terms used in documents under UCP 600 as well. These include the word "pre-pay", which essentially refers to discharging one's own obligations as opposed to "purchase", which refers to buying one's own obligations but not discharging them until maturity. The word "maximum" is used in UCP 600 to define the end of the time allowed for checking documents. Some L/C professionals still anticipate disputes over the term "maximum" that may be similar to, but hopefully less frequent than, those encountered under UCP 500 in respect of the term "reasonable time".

Issues could also arise from inadequate understanding of the provision that deals with consistency versus identical data that is not "in conflict with" data in the document or any other stipulated document. This could pose a problem for banks and customers alike should the provision not be adequately understood and interpreted.

Second advising bank and non-banks

In some jurisdictions, allowing the advising bank to use the services of a second advising bank could lead to compliance issues if the second advising bank is one incorporated in a country in which diplomatic or trade sanctions are imposed by the country of the issuing bank. This could lead to the issuing bank dealing with a bank blacklisted by its government, even if this was not what the issuing bank intended when it engaged the services of the first advising bank.

Another problem envisaged by bankers concerns queries about L/Cs issued by non-banks. "Another Banking Commission Opinion on the acceptability of such credits is likely," Taneja suggests, even though one concerning UCP 500 has already been issued and is on the ICC web site. He also suggests that credits that become operative on the occurrence of a particular event, such as the issuance of a performance bond, will have to be drafted very carefully, because such credits are not specifically contemplated in UCP 600.

Opportunities and threats

UCP 600 provides better opportunities for exporters in some situations, for example by providing them with a new option for banks to handle documents in accordance with the exporter's "previously received" instructions. But a new threat seems to have arrived alongside this new opportunity. One banker suggested that a notice of discrepancy referring to an issuing bank's decision to act on a "previously received" instruction from the presenter could be misinterpreted. This could happen if the presenter issues an instruction in its forwarding schedule instructing the issuing bank to act in case of discrepant documents, but the issuing bank does not treat such an instruction as a "previously received" one.

Positive developments

UCP 600 is bringing in positive changes - more relaxed rules on the description of goods on the commercial invoice, a separate article for definitions, the replacement of "reasonable time" with "five banking days", the reduction in time banks have to check documents and provisions relating specifically to amendments and deferred payments. And while the possible causes of confusion and dispute catalogued here will continue to concern UCP 600 users, they will no doubt hope that it achieves its ambition to remove substantial confusion and promote uniformity in international trade. Moreover, supporters of the new rules point out, with reason, that each new set of rules brings with them potentially troublesome questions that are resolved in time as practitioners get used to working with them.

Mark Ford's e-mail is markford@gotadsl.co.uk. This article represents his personal views.