Article

by Pavel Andrle

In the previous article in this issue of DCInsight, Radek Dobáš the question of the first reactions to the new UCP 600 in central and eastern Europe based on a questionnaire he developed. He also mentions the major difficulties caused by irrational or ill-thoughtout exclusions of some UCP 600 sub-articles in certain L/Cs. This troublesome trend became apparent in the last ICC Banking Commission meeting held in Paris in late October, where it was discussed as a reaction to one query requesting an ICC Banking Commission Opinion.

I was one of a few who did not so wholeheartedly welcome the elimination of the phrase "Unless otherwise stated in the Credit ... ", which was in several articles of UCP 500. This phrase was seen by the UCP Drafting Group as redundant and a cause of confusion since, according to article 1 of UCP 500 (and 600), the issuing bank can always modify or exclude any provision of the UCP. I agree that from the drafting or legal point of view this phrase was unnecessary and could even lead to the (wrong) conclusion that the L/C can only depart from the UCP wording where clearly indicated in the rules.

However, from a practical point of view, the old wording of UCP 500 indicated where a modification was envisaged and therefore provided a useful guidance to UCP 500 users. Now there is no such guidance in UCP 600, and it was even quite often suggested and stressed during the revision process that any UCP 600 provision could be excluded or modified. Apparently, drafters of L/Cs got the message and have started to do just that. The absence of the phrase except in article 1 has been even considered a "cushion" by those who didn't like some of the new UCP 600 provisions, and gave them the idea that they can always exclude or modify them.

Even though, in UCP 500, one could always exclude or modify any provision, this had not been so obvious and openly suggested. Users considered UCP 500 to be tight rules and did not interfere with them except in the case of a few well-understood and necessary modifications (as was the case with standbys, for example).

Any exclusion or modification of the UCP 600 must be well thought through. I have even heard of a case where an issuing bank excluded the whole of article 7! I offer here some examples of troublesome exclusions.

Sub-articles 12(b) and 7(c)

Some banks exclude sub-article 12(b), which states: "By nominating a bank to accept a draft or incur a deferred payment undertaking, an issuing bank authorizes that nominated bank to prepay or purchase a draft accepted or a deferred payment undertaking incurred by that nominated bank."

The obvious reason for this exclusion is to avoid the obligation to reimburse the nominated bank which prepaid or purchased a draft accepted or a deferred payment undertaking incurred by that nominated bank if fraud was then discovered before maturity. However, another sub-article of UCP 600, namely sub-article 7(c), refers to the issue as well, saying: "An issuing bank undertakes to reimburse a nominated bank that has honoured or negotiated a complying presentation and forwarded the documents to the issuing bank. Reimbursement for the amount of a complying presentation under a credit available by acceptance or deferred payment is due at maturity, whether or not the nominated bank prepaid or purchased before maturity. An issuing bank's undertaking to reimburse a nominated bank is independent of the issuing bank's undertaking to the beneficiary" (emphasis added).

The question is whether the language of the sub-article 7(c), if not also modified in its own right, suffices to oblige the issuing bank to reimburse the nominated bank which prepaid or purchased before maturity even if fraud occurred in the meantime. Clearly, the full exclusion of the sub-article 7(c) would cause an enormous problem, as it sets out the broad general reimbursement obligation of the issuing bank towards the nominated bank.

I believe that this provision of subarticles 12(b) and 7(c) should not be excluded or modified by banks at all. It provides them with clear and welcome protection. Banks deal only with documents; the risk of fraud should be obviously that of the applicant. The stance of some banks that they welcome the provision when they are nominated banks - to feel secure in financing the deferred payment or acceptance L/C - but they refuse it when they issue an L/C, is a bit hypocritical.

Exclusions having little impact: sub-article 14(k)

Some banks have started to exclude sub-article 14(k), which states: "The shipper or consignor of the goods indicated on any document need not be the beneficiary of the credit." Without further clarification, what effect does this exclusion have? Obviously, in excluding the sub-article, the issuing bank sought to prohibit the option that the shipper or consignor of the goods would be a party other than the beneficiary. However, if something is excluded does that automatically mean that the opposite meaning of the excluded provision would then apply?

One possible argument is that by excluding something from the UCP we are effectively deleting the respective wording from the rules we apply, so that we then interpret the L/C terms and conditions only with the remaining UCP provisions. But if there is no other condition to the contrary in the L/C itself, I would argue that the shipper or consignor of the goods could still be a party other than the beneficiary, since the L/C did not expressly prohibit it, i.e., unless it is in conflict with any other presented requested document, then it is valid.

I understand that a more academic approach would be to suggest that the obvious will of the issuing bank was to prohibit the option provided by the excluded sub-article. I cannot follow this logic since, in my view, to accept it would effectively endorse the poor drafting of L/Cs. If there is any ambiguity in the L/C terms and conditions, it should always be construed against the issuer, the issuing bank, which is responsible for the drafting of its L/Cs in the first place.

This possible clash of conflicting opinions could have been easily avoided by resorting to modification instead of exclusion. If the L/C clearly said that the shipper or consignor of the goods on all documents must be the beneficiary, there would be no room for argument.

Sub-article 14(l)

There have also been exclusions of the new sub-article 14(l) of UCP 600, which was introduced to replace article 30 of UCP 500. This sub-article states: "A transport document may be issued by any party other than a carrier, owner, master or charterer provided that the transport document meets the requirements of articles 19, 20, 21, 22, 23 or 24 of these rules."

What is meant by this sub-article? The old article 30 of UCP 500 covered transport documents issued by freight forwarders in the capacity of carriers (named as carriers), or in the capacity as agents (named as agents) for named carriers1. In other words, the freight forwarder acted as a carrier or an agent for the named carrier. In my view, the article was included in UCP 500 to accommodate the change from the more favourable UCP 400 wording accepting documents issued by FIATA freight forwarders, to a new era when transport documents issued by any freight forwarder were acceptable as long as they indicated the forwarder as the carrier or the agent for the named carrier2.

During the UCP 600 drafting process, it was decided to remove the redundant and confusing article 30, but later, under pressure from the freight forwarding industry, sub-article 14(l) was added. However, it appears that 14(l) broadens the concept contained in the old article 30 of UCP 500 to cover any party as the issuer, which also includes freight forwarders. In practical terms it does not broaden the acceptability of issuers of transport documents at all, as it refers to the other UCP 600 articles which clearly govern the rules regarding the issuance of these documents. The impact of 14(l) and the respective transport articles to which it refers is that a transport document could be issued by anyone as long as that "anyone" is specified as the carrier, master, owner or charterer, or the agent for a carrier, master, owner or charterer. If someone is designated as the carrier on the transport document, then for a document checker, it is the carrier.

A freight forwarder signing as a carrier is a carrier under UCP 600, not a freight forwarder. At times, freight forwarders act as carriers or agents of carriers, and at other times they act as mere freight forwarders. For a banker, they are what the document indicates.

Therefore, what happens if sub-article 14(l) is excluded? Nothing, as the excluded 14(l) merely refers to other transport document articles which clearly cover the requirements of their issuance.

Conclusion

In my view, exclusions are to be discouraged. If one really needs to adapt the UCP 600 to his L/C, he should first think about modification - giving the express and clear condition in his L/C which would override the general UCP 600 rule. If one excludes anything from UCP 600, then he should also state the condition which would then govern the issue excluded.

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

1. Or multimodal transport operators or agents for named multimodal operators.

2. Or the multimodal transport operator or as the agent for the named multimodal transport operator.