Article

by Dan Taylor

When I first came to the International Financial Services Association, I began to explore the files of the organization which dated back to the 1920s, when it was originally founded. My reason was to gain a better understanding of the rich history of an organization which, at that time, had been in existence for 65 years and to explore its involvement and influence on international banking. What I found was a wealth of material on the subject and, perhaps more surprising, a significant amount of information about the early development of rules for letters of credit, including the first UCP.

This discovery of data aroused my curiosity and led me to dig further into the history. This past year, as work was completed on the second revision of the UCP in which I have participated, I decided it would be worthwhile to compile all of this material into a work that could be of interest to others in the letter of credit community, as well as to document, for ICC, a history of its rulemaking that even it did not possess. In April of this year, ICC published The Complete UCP - Texts, Rules and History 1920 to 2007, ICC Publication No. 683.

Background

A good deal of my motivation in compiling this collection was to provide as complete a collection as possible of all the documents relating to the development of the UCP. Most of this information, including the rules prior to UCP 400 or 500, is unknown to practitioners today. In my view (and that of others), the UCP is the prime example of what industry self-regulation can accomplish in a global environment. Worldwide trade and its financing have relied on these rules to provide order and certainty to the market, an incalculable value over the past nine decades.

For the most part, with the exception of the US1, there is no developed legal framework for letters of credit. The world relies on industry self-regulation provided by the UCP. The Complete UCP documents as much of this history as I have been able to find.

Early rules

The first known letter of credit rules were the Regulations Affecting Export Commercial Credits Adopted by the New York Bankers Commercial Credit Conference Of 1920. The introduction to these rules contained the first reference to "standard practice", a term which remains in UCP 600. In addition, the first article of the Regulations states: "We assume no liability or responsibility for the form, sufficiency, correctness, genuineness or legal effect of any documents, or for the description, quantity, quality, condition, delivery or value of the merchandise represented thereby, or for the good faith or acts of the shipper or any other person whomsoever ... ." Compare this with UCP 600 article 34: "A bank assumes no liability or responsibility for the form, sufficiency, accuracy, genuineness, falsification or legal effect of any document, or for the general or particular conditions stipulated in a document or superimposed thereon; nor does it assume any liability or responsibility for the description, quantity, weight, quality, condition, packing, delivery, value or existence of the goods, services or other performance represented by any document, or for the good faith or acts or omissions, solvency, performance or standing of the consignor, the carrier, the forwarder, the consignee or the insurer of the goods or any other person." In fact, there are twelve articles in UCP 600 whose wording is very similar to the first UCP and the rules that preceded it.

Other developments

There are other significant provisions in the early versions of the rules that have been retained over the years. The original UCP in 1933 introduced the concept of examining documents "on their face", which remains in UCP 600 article 14. In addition, the much- debated issue of the acceptance of bills of lading issued by freight forwarders also dates to the original UCP. The 1933 version stated that bills of lading issued by forwarding agents will be refused.

The next revision of the UCP, in 1951, introduced the basic methods of availability that we know today - payment, acceptance and, as contained in UCP 600, the concept of "purchase". Prior to the 1951 rules, almost all credits were issued in paper form, and it wasn't until this revision that the terms "cable" or "telegram" were introduced. The 1951 revision also introduced wording stating that "the description of the goods in the commercial invoice must correspond with the description in the credit", which is also found in UCP 600.

Until the following revision in 1962, the reference to Incoterms as shipping terms was not applied in the US, even though Incoterms had been established by ICC in 1936. For some years, the US continued to use the American Foreign Trade Definitions, which were dropped only after the introduction of UCP 222. Since then, Incoterms have become the global standard.

Until the next revision in 1974, the UCP continued to refer to transport documents related to cotton shipments from the US. With the 1974 revision, the concepts of unitized or containerized cargo were introduced, even though the use of containers started in the 1950s. Between 1968 and 1970, the International Standards Organization (ISO) created global standards for the use of containers, which ensured the interchangeability between different modes of transport worldwide.

In the following revision, in 1983, standby letters of credit were introduced into the rules when the words "... including, to the extent to which they may be applicable, standby letters of credit" were made part of article 1. Other changes were made to accommodate standbys throughout the rules. The 1983 revision also added two additional changes to practice: the introduction of a separate article for reimbursement on a third bank (bank-to- bank reimbursement) and the addition of the terms "teletransmission" and "telecommunication" to accommodate the evolution in communications among banks.

These are but a few of the changes made to the UCP over the years that keep them current with both banking and commercial practice. By understanding the evolution of the rules and the practices behind them, one can gain a deeper appreciation of the value of the rules today.

The Complete UCP - Texts, History and Rules 1920 to 2007 can be ordered from http://www.iccbooks.com.

Dan Taylor's e-mail is Dan.Taylor@intlbanking.org

1. In the US, the Uniform Commercial Code, Article 5, was developed in the early 1950s to serve as positive law governing letters of credit.