Article

by N.D. George, CDCS (Distinction)

Loss of ships at sea was a regular occurrence in the olden days.

Though subsequently airmail became available, the reliability of mail sent through the postal system could also not be taken for granted, for a variety of reasons. In order to minimize the probability of documents getting lost en route and consequent inconvenience to the parties involved, it became standard practice to produce documents in two sets and to mail them separately on different dates. Banks across the world invariably insisted on such an arrangement in their credits until the advent of courier services.

With the evolution of courier service and its widespread acceptability across the world as the most convenient and reliable way to dispatch documents, more and more banks began to put documents in one mailing. These days it is rare to see any documentary credit asking for documents to be mailed in two lots. I have no statistics on the number of times courier companies have failed to deliver. Going by my own experience of losing only one courier delivery in the last ten years, I reckon that deliveries of documents sent to/by banks rarely fail to reach the addressees. Although the incidence is rare, UCP 600 has an article to deal with the eventuality if it were to arise, by the incorporation of the following paragraph, in article 35:

"If a nominated bank determines that a presentation is complying and forwards the documents to the issuing bank or confirming bank, whether or not the nominated bank has honoured or negotiated, an issuing bank or confirming bank must honour or negotiate, or reimburse that nominated bank, even when the documents have been lost in transit between the nominated bank and the issuing bank or confirming bank, or between the confirming bank and the issuing bank."

Not surprisingly, the above clause has unnerved bank staff in the trade finance department. In my interaction with several persons in this field, I came away with the impression that most understood this provision to mean that an issuing bank must pay with no questions asked on receiving a message from the nominated bank stating that the presentation was complying and that the documents were forwarded but had been lost in transit. Some commented that banks must not issue freely negotiable credits, since the potential for documents to go missing is greater in those situations. It is said that beneficiaries' banks may even stoop to the level of deliberately causing discrepant documents to go missing in order to claim payment later by certifying that complying documents were presented and forwarded. Some even suggested that a documentary credit must contain a clause stating that paragraph 2 of article 35 is not applicable.

Reading too much

While the concerns are understandable and more detailed language in article 35 would have helped eliminate them, I am of the opinion that banks are reading considerably more into this article than was probably intended by the Drafting Group. It is my view that if trade finance staff in banks believe that UCP 600 has presented issuing banks with a "you ask - we pay" kind of situation, they are mistaken.

My reading of paragraph 2 of article 35 tells me that there is no suggestion whatsoever concerning any stipulated procedure to be followed in case of loss of documents. A careful reading of this paragraph will reveal that it just makes a statement of principle and leaves it at that. The principle simply goes to affirm that the risk of loss of documents between nominated banks/confirming banks/issuing banks is not for the account of the beneficiary. It cannot be any other way, as the beneficiary fulfils its part of the bargain by making a timely presentation to the nominated bank, and it cannot be held responsible for a subsequent loss of documents.

The paragraph simply states some facts without specifying the methodology to establish the veracity of those facts. The facts stated are (a) documents were complying, (b) the nominated bank had forwarded them, (c) the documents have been lost and (d) loss occurred during transit. The question to be asked is whether the facts are to be taken at face value or whether there is a need to make reasonable efforts to establish their correctness.

If one reads paragraph 2 of article 35 in isolation from the rest of the articles in UCP 600, the answer would be "the facts are to be taken at face value", but if one reads UCP 600 as a whole then the answer would be "there is a need to make reasonable efforts to establish the correctness of the facts." The fundamental point to remember is that one should not read any one article of UCP to the total exclusion of all other articles. All articles of UCP are interrelated in some way. That said, let us try to break down the facts stated in paragraph 2 of article 35 and see if there are other articles within UCP to which a linkage can be established.

Complying documents

Article 2 defines "Complying presentation" as "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". This definition makes it clear that the documents do not become "complying" if they are lost while in transit to the issuing bank. For a presentation to be complying, the documents should have complied with (a) the terms and conditions the credit, (b) the applicable provisions of UCP and (c) international standard banking practice.

Who has the right/obligation under UCP to decide whether documents are complying? There are three parties: the nominated bank acting on its nomination, a confirming bank and an issuing bank. Sub-article 14(a) says: "A nominated bank acting on its nomination, a confirming bank, if any, and the issuing bank must examine a presentation to determine, on the basis of documents alone, whether or not the documents appear on their face to constitute a complying presentation."

This article begs the question "what is a presentation", which in turn takes us back to article 2 wherein "Presentation" is defined as "either the delivery of documents under a credit to the issuing bank or nominated bank or the documents so delivered". Sub-article 15(c) says: "When a nominated bank determines that a presentation is complying and honours or negotiates, it must forward the documents to the confirming bank or issuing bank." Sub-article 16(a) says: "When a nominated bank acting on its nomination, a confirming bank, if any, or the issuing bank determines that a presentation does not comply, it may refuse to honour or negotiate." Sub-article 17(a) says: "At least one original of each document stipulated in the credit must be presented." These articles establish the linkage to the issuing bank's rights and responsibility in the following manner:

- The issuing bank has (1) a right to receive documents and (2) a right to examine them, (3) a right to reject them if they are not complying and (4) a right to be presented with the documents which are originals.

- With regard to the responsibility of the issuing bank, sub-article 15(c) says: "When an issuing bank determines that a presentation is complying, it must honour."

By breaking down the various elements above, it becomes clear that any loss of documents in transit from nominated bank to issuing bank would result only in the withdrawal of right No. (4), i.e., the right to be presented with original documents. The issuing bank does not forfeit any of its other rights, nor its responsibility.

Standard banking practice

It is beyond the scope of UCP to lay down the operating procedures that are to be followed between two banks in the event of loss of documents. Therefore, the procedure will vary in each case depending upon the circumstances of each and the nature of the documents involved. Some banks may be happy to pay based on a certification from the nominated bank, but some may want more evidence. The latter banks will not be faulted for asking for evidence in accordance with standard banking practice.

Terms of the credit

The issuing bank normally states in its credit the methodology for mailing documents. If the credit calls for documents to be sent by DHL courier, the issuing bank has a right (indeed an obligation to the applicant) to seek evidence that the courier company used was DHL and no other company in order to establish that the terms of the credit in that respect have been complied with. This is very important if it later becomes known that the lost documents were misused and the goods were cleared by the wrong party as a result.

Similarly, it is standard practice - not just in the L/C world - to begin reconstruction of lost documents by starting over from copies. Applying this practice, the issuing bank has a right to ask for copies of the documents. Once it receives copies, it has a responsibility to look at them (again following standard banking practice and the provisions of UCP described above under "Complying presentation"). If the copies evidence shipment of wheat when the credit had called for rice, the issuing bank will be justified in refusing to reimburse, just as it would be if it had received original documents. It seems odd, to say the least, that an issuing bank could reject such documents if originals had been received but not when originals are lost!

In conclusion, I do not believe issuing banks have any reason to feel threatened by article 35. However, they are well advised to amend their reimbursement agreement (usually the small print appearing on the back of an L/C application) to draw the attention of the applicant to this provision and bind it.

N.D. George is a Vice President at Arab Banking Corporation, BSC, Manama, Kingdom of Bahrain where he heads Loans and Trade Finance Operations. His e-mail is george.devassy@arabbanking.com. The views expressed in this article are the author's and do not necessarily represent those of Arab Banking Corporation, which accepts no liability for them.