Article

by Haluk Erdemol

I refer to the "International Bulletin" section of DCInsight's October-December 2007 issue and would like to comment on each of the three commentators' remarks, which tend to criticize UCP 600 in some respects.

Ivan Simeonov from Bulgaria refers to some of his readings from "a number of specialized writings and articles" and experts and quotes their views as saying that "Should the credit be available by payment at sight, the issuing/nominated bank must pay at sight." He then draws his own conclusion that the payment system under unconfirmed credits is not working in line with beneficiaries' expectations.

I do not agree with his remarks. First, the quoted view is not correct as far as the nominated bank is concerned: The nominated bank is not obliged to pay (honour) or negotiate except when expressly agreed to by that nominated bank and so communicated to the beneficiary (UCP 600 sub-article12 (a)). If the nominated bank does not pay or negotiate and simply sends the documents to the issuing bank, the issuing bank must pay (honour) if the presentation complies (sub-article 7 (a) (ii)). In the latter case, the nominated bank becomes a bank not acting on its nomination. Contrary to the statement of the commentator, there is nothing "unfortunate" in the latter situation if the nominated bank elects not to act on its nomination. It would be up to the beneficiary to decide whether he is happy or not with his acceptance of an unconfirmed credit and the way his banker operates under such a credit.

I also do not agree with Mr Simeonov's remarks criticizing the L/C system and the settlement mechanism under unconfirmed credits as being similar to that of a documentary collection "from which beneficiary may suffer considerably from problems of cash flow management" when the credit is available with either the issuing bank or nominated bank by payment at sight. Mr Simeonov considers two separate availability situations to be one and the same. If the credit is available with the issuing bank, there is only an advising bank which is not a nominated bank. Therefore, the payment method will naturally be remittance of funds by the issuing bank to the advising bank's designated account. This is not called "reimbursement", since there is no nominated bank acting on its nomination to be reimbursed.

On the other hand, if the credit is available with the nominated bank, there must be a reimbursement clause in the credit, because in this method of availability the issuing bank is obliged to reimburse the nominated bank if that bank acts on its nomination. The reimbursement method (by claiming via SWIFT or telex from the issuing bank or from a designated reimbursing bank (SWIFT Field 53)) would ensure a good cash flow for the beneficiary. If the credit does not include a reimbursement clause, as Mr Simeonov states, the nominated bank should ask for such a clause upon receipt of the credit. Otherwise, i.e., if the nominated bank does not act on its nomination, then it will have to wait for the issuing bank's remittance of funds or its authority to claim payment from the designated reimbursing bank. Consequently, the beneficiary who expects a prompt settlement (good cash flow) and the commentator have no justifiable grounds for complaining about unconfirmed credits if the beneficiary accepts a credit available with the issuing bank or a credit available with the nominated bank, but when that bank does not act on its nomination.

Badly issued credits

I am also unable to agree with the following issues mentioned by Chang- Soon Thomas Song from South Korea. Mr Song claims that applicant-controlled conditions and mechanical determination of discrepancies undermine the credibility of the credit instrument and uses some sample cases. With regard to the first issue, I would simply invite reference to ISBP 681 paragraph 4. On the second issue, I would point out that the credibility of the credit instrument cannot be considered "undermined" because of badly issued credits, document checkers who are not efficiently educated by UCP, ISBP, URR, ICC Opinions and DOCDEX Decisions and beneficiaries' failures to submit complying presentations. Mr Song provides sample cases in support of his comments in which -

- an applicant, after shipment, is supposed to send an amendment through the issuing bank indicating that the goods are in order with this amendment to be presented at negotiation;

- an inspection certificate is to be issued by the applicant with the signature to be verified by the issuing bank, but the issuing bank does not have on file the specimen signature and may refuse it claiming that the signature does not conform;

- a DHL receipt required by the credit was not presented.

These cases are self-explanatory. They demonstrate the problem of badly issued credits and parties' wrongful actions. It is banks' duty to be good authors of their credits and to make sure that any presentation is a complying one, while it is the beneficiary's duty, for his own benefit, to make a complying presentation. One or more discrepancies observed by banks as a result of proper checking may be insignificant, but they may be rectified by the beneficiary and, at the end of the day, a willing applicant can always waive the unrectified discrepancies. I do not think that under UCP 600 there is anything undermining the credibility of the documentary credit system.

Other critiques

I am also unable to agree with the issues raised by Xavier Fornt, who criticized UCP 600 in many respects, despite the fact that he concludes his article with "Long live UCP 600!" Mr Fornt asks, under article1: "How many modifications or exclusions will we be faced with?" I would respond that UCP 600 does not and cannot limit the number of modifications and exclusions. They can be many. It would be up to the issuing bank, as a good author, to monitor their number and nature, to fill the voids arising from exclusions. It is also up to nominated banks and beneficiaries to assess their impact and to decide how to respond to them.

Mr Fornt then claims that "for many practitioners 'negotiation' remains a confusing term". In my view, "negotiation" was redefined to make sure that it is understood by those who did not understand it during the lifetime of UCP 500. It is not a confusing definition, at least for me. One should simply consider what a bank does when it buys a check drawn on another bank and then apply the same procedure to a draft and/or documents presented under a credit available by negotiation.

Mr Fornt has doubts as to whether "article 14 will be enough to reduce the number of discrepancies having little foundation that block payments". But we cannot expect UCP 600 or any future revision to cover hundreds of scenarios that can arise in the course of document checking. In my opinion, article 14 contains considerable flexibility and a number of clarifications, supported by ISBP, to minimize the number of rejections.

Mr Fornt, referring to sub-article 14 (b), asks: "How many times will we see documents presented after the expiry deadline that users will try to include because they are allowed the five-day period?" I am unable to comment on this one, as I cannot find a connection between "documents presented after the expiry deadline" and the "five-day period".

The commentator then asks, under sub-article 18 (c) "whether the international banking community will know how to interpret the concept 'corresponds with'". The international banking community should have already known what is meant by the concept. That's why it remains unchanged from UCP 500.

Mr Fornt than asks, under subarticle26 (c): "Will costs additional to freight be reasonable or, will we have to finance operations with abusive costs?" But sub-article 26 (c) is not new; it is old sub-article 33 (d) from UCP 500. Charges additional to freight are mainly loading, unloading, stowing and trimming charges, and banks are not concerned whether they are reasonable or not and have nothing to do with any financing.

Mr Fornt has doubts regarding sub- articles 28 (i) and (j) as to whether "We will see reasonable exclusion clauses and franchises, or will we have to finance operations having little cover." In fact, issuing banks are able to protect their interests in the credits they finance by monitoring their customers' credit applications to determine whether the insurance cover would be affected by exclusions or franchises.

Concerning article 30, Mr Fornt questions whether a given tolerance for the amount would be applicable to the other two tolerance categories as well. The answer is already included in article 30 as it was in UCP 500 article 39. A tolerance given for amount is for the amount only. ICC Opinions R 293, R 365 and R 367 reinforce this.

The commentator then says that, "article 35 grants (in case documents are lost) an excellent protection to the beneficiary, but the applicant will remain unprotected and may not be able to dispatch the goods without documents." From the expression "dispatching of the goods by the applicant", I understand "possession of the goods by the applicant". In this respect, the applicant is able to protect itself by means of a special condition stipulating that documents should be sent in two separate lots. Otherwise the beneficiary's ethical duty to help the applicant by creating a fresh set of documents or his arrangement with the carrier would be relied upon.

Mr Fornt raises the issue of "the confusion between transferable and backto- back credits". It is clear that back-toback credits are not covered by article 38; therefore, one should not refer to it for these credits.

Finally, in response to the final remarks of the commentator with reference to "different interpretations of bankers coming from different cultures", I would add that while bankers may come from different cultures, they can be educated by UCP, URR, ISP, ISBP, ICC Opinions and DOCDEX Decisions, and they should have only one common documentary credit culture. Their different interpretations raised during the revision process have already been openly discussed and the best possible consensus under UCP 600 was reached, as evidenced by its unanimous approval.

Haluk Erdemol is a member of the ICC Banking Commission and ICC's Turkish National Committee.

His e-mail is herdemol@yahoo.com