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Nicole Keller, who was a member of the UCP 600 Drafting Group, is Senior Project Manager in Trade and Export Finance at KfW IPEXBank GmbH in Frankfurt, Germany. She has been a member of the ICC Banking Commission since 2000 and has taken part in other Commission projects, particularly the electronic trade and settlement process and the eUCP. Keller: exclusion clauses may be a side effect of transparency

Writing this in early 2008, it is obviously too late to describe this period as the "advent of UCP 600". Since the rules were introduced to the banking community and users worldwide prior to their coming into force in July 2007, and since they have been in force for over six months, one could describe this stage as the nursery school period.

However, considering the number of documentary credits issued subject to UCP 600 but including exclusion clauses to excess, one could even say that the rules have already left nursery school and made a premature entry into adolescence.

Even though these exclusion clauses make excellent material for discussion, I would like to focus on a remark of a participant in one of my seminars on the new UCP, who claimed that it was a mistake to make UCP 600 as clear as they are now. While the statement as such may seem shocking, it also reveals a deep understanding of what may be the reason for all of the exclusion clauses.

Access and side effects

The language and structure of UCP 600 are frequently described as being much clearer than their predecessor, UCP 500, a statement the Banking Commission may take as a compliment. Surely, one of the goals of the revision was to promote the UCP by making access to them and their related instrument, the documentary credit, easier. One way of lowering the threshold is to provide transparency on what are the liabilities and rights of the parties to a documentary credit.

The recent flood of exclusion clauses may be a side effect of this transparency. Issuing banks and applicants accustomed to handling documentary credits used wording and processes that were well established and not regularly challenged. It was not often the case that this was accompanied by a continuing analysis of the risk structure of the credits.

Now, faced with a new UCP, the analysis of risk will certainly not be restricted to parts of the UCP that have been changed, but to the rules as a whole. And in that process, some of the parties may not be pleased to learn about the risks inherent in their business as conducted in the past.

After the introduction of UCP 600, market participants were looking for information, consultancy and training. ICC, with its national committees and the banking community, responded to that need. It is my impression that the excess of exclusion clauses is not a result of insufficient training. It may instead be a result of the detailed analysis/discussions taking place after the introduction of UCP 600, which enhanced awareness of the nature of issuing banks' obligations.

Article 35

One might well ask why have issuing banks that have now learned about the particular risks associated with a credit being available in the country of the beneficiary waited for the UCP 600 to exclude a risk they were willing to assume for documentary credits issued under UCP 500. It could be a question of misleading information. UCP 600 includes a number of provisions that, in a cursory glance at the rules, may be thought of as changes, but which are, in fact, merely clarifications of what was always part and parcel of the characteristics of documentary credits. The prominent example here is the second paragraph of article 35, which reads: "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."

This article essentially says that once a documentary credit available with a nominated bank has been issued, the issuing bank is no longer in the driver's seat when it comes to changing its position within this structure, e.g., whether or not the nominated bank is prepared to act on its nomination.

When a presentation honoured or negotiated by the nominated bank is lost on its way from such bank to the issuing bank, the issuing bank still has an obligation under its documentary credit. This was the position in UCP 500; the difference is that the decision of a nominated bank can no longer change the position of the beneficiary.

Issuing banks now excluding this paragraph did not necessarily restrict their obligation under a UCP 500 documentary credit to presentations received at their counters. This leads to the assumption that this minor change only now made banks aware of a concept that was already inherent in UCP 500.

An interesting issue linked to the exclusion of this paragraph is determining what constitutes the loss of documents which is, in turn, connected with the issue of timing. As long as the documents are not reported lost, but merely delayed, the obligation of the issuing bank is still in force and will remain so even though the credit may have long ago expired. Thus, to make a documentary credit available only at the counters of the issuing bank is even more advantageous than to issue a credit having a "concealed" availability with the issuing bank.

Sub-article 14 (l)

Sub-article 14 (l) may also be an example of how more transparency results in exclusion clauses. This sub-article, when compared to its predecessor, article 30 in UCP 500, offers changes in words but not in substance. Pavel Andrle, in the last issue of DCInsight, described how this particular sub-article was re-introduced into the UCP during the drafting process as a result of comments provided by the transport community, which were supported by ICC national committees. As a result 14 (l) is an exception to the general approach of avoiding repetitions within the UCP.

While article 30 of UCP 500 was already covered by " article 23 of UCP 500, UCP 600's sub- article 14 (l) finds its equivalent in article 20. But just repeating a requirement in two articles should not account for the increase in exclusion clauses. While article 30 of UCP 500 was rarely excluded, 14 (l) of UCP 600 seems to be a favourite one for exclusions. Since old article 30 and new article 14 (l) do not differ in content and substance, I believe the notoriety of article 14 (l) may be a result of clear language and transparency in the rules. Let me elaborate.

Sub-article 14 (l) may be considered to be a superfluous sub-article (a sentiment I wholeheartedly share), but it offers also an interpretation of how to apply the principles (mainly "appear on their face") set out in sub-article 14 (a) concerning the requirements of sub-article 20 (a) (i). Banks do not witness the process of issuance of any document; banks are only concerned with what appears on the document when presented and consequently do not care by whom a document has been issued but only about the function claimed by the signor.

While old article 30 reflected only part of this commonplace statement and referred only to freight forwarders as potential issuers, new sub-article 14 (l) is clearer and more transparent in revealing that that they, as well as other issuers, will be treated in a non-discriminatory manner.

The relationship of sub-article 14 (a) to 20 (a) (i) illustrates why the exclusion of 14 (l) is problematic. The intention of issuing banks in excluding 14 (l) is as unclear as was the well-known inclusion of the clause "freight forwarder bill of lading not acceptable". However; while the latter simply related to the language of old article 30 and new article 20 respectively and repeats it, the exclusion of 14 (l) causes confusion as to its impact on UCP 600 sub-articles 14 (a) and 20 (a) (i). Both are equally inappropriate to create clear and precise requirements under documentary credits, and beneficiaries and nominated banks should be careful when dealing with them.

Sub-article 12(b)

Another exclusion clause of choice concerns sub-article 12 (b), which does indeed contain a change from UCP 500. Banks excluding this sub-article may also exclude sub-articles 7 (c) and 8 (c), effectively making such credits available only at the counters of the issuing bank. Beneficiaries under these credits with exclusion clauses will surely find it difficult to find a bank with the title of nominated bank (but without the full authorization and protection normally accorded such banks) that will honour such a presentation. It will be equally difficult to find a bank willing to confirm such credits. These difficulties apply to the exclusion of article 35's second paragraph as well.

Of course, one should not forget that in principle an exclusion clause is not a bad or dangerous thing. The structure of UCP has always offered default requirements when a credit is silent on such issues. It also envisages that documentary credits will include specific requirements if the need arises. Specific requirements will always supersede standard requirements of the UCP.

Nevertheless, exclusion clauses falling in either of the following categories are the ones causing problems, and all parties to a credit should handle them with care. These are (1) exclusion clauses deleting a default requirement without compensating for it with specific requirements, thus creating a vacuum; and (2) exclusion clauses negating availability as determined (e.g., in field 41a of an MT700) by effectively removing the protection accorded a nominated bank.

Nicole Keller's e-mail is Nicole.Keller@kfw.de