Article

by Donald Smith

This article appears a little more than a year after UCP 600 came into effect. There are a number of conclusions one can draw from this first year of the rules. Below are some of my own, listed from 1-10.

1 People fear what they do (not) understand. UCP 600 is a vast improvement in clarity over the UCP 500 and preceding versions. It is well-structured and some archaic language has been rewritten. Combined with extensive training on the UCP, this clarity has led to interesting results as applicants, bankers and beneficiaries are becoming aware of the impact of the rules and their roles and responsibilities. Some, failing to understand the same principles in the UCP 400 and UCP 500, now object to them in UCP 600. Why would someone now object to something with which they have lived perfectly well through the past version(s)? Perhaps there has been a change in personnel at the applicant, bank or beneficiary? Or perhaps there is an "unintended consequence" resulting from the "insourcing" or "outsourcing" work? Or, perhaps we should move to number 2.

Knowledge gap

2 A knowledge gap exists and is widening. Long gone are the days when a document examiner would be soundly chastised for asking: "You mean I'm expected to know there is more than one port in New York?" (see www. worldportsource.com). Today, new document examiners are being trained with a "decision tree" - everything is either "yes" or "no", "black" or "white." But the L/C world is full of "maybe" and "shades of grey", and professional document examiners are expected to know what a Clean Report of Findings looks like, and to recognize an SGS hologram. Letters of credit are both an art and a science - the clients make their own deals, the banks issue a credit to be a neutral paymaster. If the documents comply, the bank honours. If the documents do not comply, the bank is not obligated to honour. Sound letter of credit practice, including the ability to examine documents, starts with Know Your Customer, proper issuance and amendment, advising and confirmation and transfer of credits - it does not start when the documents arrive.

Exclusions

3 Exclusions may be the death of the UCP. This point ties directly to number 1. For example, credits are being issued stating "Sub-article 7 (c) is excluded" - full stop. It appears the issuers are not considering the impact on the beneficiary and on the nominated bank of excluding this article. For those who do not understand this, see point number 2 above and number 9 below. UCP 600 reflects the "customs and practice" of a method of payment, developed over years and years of experience. The failure to comprehend both the individual rules and how they work together cohesively as a body of practice to facilitate the role of a credit issuer as a neutral paymaster can be a fatal mistake to an issuing, advising, confirming or transferring bank, as well as to an applicant or beneficiary. One can NOT simply exclude an article without thinking through the ramifications of his action on all of the remaining articles and on the others involved in the transaction. Simply excluding an article does NOT mean the reverse of the article is automatically invoked.

Compliance

4 Regulatory compliance issues have always existed - every person (company, legal entity) is subject to various laws and regulations which have authority over them. If the law which governs one's actions prohibits him from making payment, he obeys the law. The confusion apparently arose from the recent practice of explicitly stating in a credit that the issuer will follow the law. Amazingly, this troubles some people! So what has caused the insertion of these regulatory compliance clauses into credits? Most likely it results from banks' fear of being caught in a "conflict of law" situation. For example, suppose an overseas branch must, under its local law, pay a set of documents that violate the law in the country of its head office. Head office says: "You cannot pay because it violates our law and, as a branch, you are also subject to our law." By inserting one of these compliance disclaimers, issuers hope to be able to make the case that they have put the beneficiary on notice that their head office law applied to the transaction.

Open account and L/Cs

5 The move to open account and to letters of credit has accelerated. No, this is not an oxymoron; it's just that different clients in different countries are now moving to L/Cs from cash in advance, while other clients in the same or other countries are continuing to move to open account from letters of credit. Wise credit managers know they need to determine the creditworthiness of their clients and to require the method of payment appropriate to the sale. Wise bankers should pay more attention to their clients, especially when it comes to consulting with them regarding the appropriate method of payment.

Feedback from over 1,000 corporate users in the past year indicates that applicants and beneficiaries move away from L/Cs for two primary reasons: 1) COST and 2) COST. Cost #1 comes from the "pile on" impact of fees applied by issuers, advising, negotiating, transferring, amending et al. The history of the business reflects the practice that banking fees in the applicant's country are for the applicant, and the fees in the beneficiary's country are for the beneficiary. In the 1980s, a practice developed whereby some banks started issuing credits for certain applicants without charge and then deducted their fees from the amount paid to the beneficiary. A further variation of this occurred when banks on both sides of the transaction tried to deduct their fees from both parties - the traditional "double-dip".

Cost #2 concerns discrepancy fees and delays in payment. Discrepancy fees started as a "nuisance fee" deducted from the amount paid to the beneficiary as a way to get the beneficiary's attention and to remind him that he was making mistakes. They have now turned into a profit centre for some banks that find "mythical discrepancies" in documents. UCP 600 attempted valiantly to deal with these mythical discrepancies in several articles, only to see applicants and banks excluding these articles. See point 3.

Lawyers

6 What lawyers and bankers do not know helps lawyers and hurts banks. The recent comments from the ICC Transport Commission and the ICC Commercial Law and Practice Commission concerning whether a party was signing as the carrier or as an agent for the carrier is an excellent example. Letter of credit bankers in the Banking Commission were undecided, so they turned to their compatriots in the other two commissions for assistance. The resulting feedback will surely lead to additional confusion and needless litigation as the Transport Commission stated that a party was acting as an agent while the Commercial Law and Practice Commission said the same party is taking responsibility for the carriage of the goods. This is but one example, and the present discussion of a requested ICC Opinion concerning the release of goods without presentation of original bills of lading represents another.

This is not a "knock" on our brethren in the legal profession. I have had the privilege of working for four banks, and each utilized their legal resources slightly differently. In my view, the most effective use was by the bank that let the trade business run the trade business instead of letting the lawyers run the trade business. Lawyers are exquisitely trained in the intricacies of law; very few are trained in the intricacies of the practice of trade. Note that I use the word "practice", not theory. Trade bankers are daily faced with decisions whether to "honour" or "dishonour" a set of documents based on their examination of the documents, the rules, the credit, isbp and ISBP (the book). In many banks, document examiners must make these decisions 12-20 times a day. I know of only one lawyer who could effectively examine trade documents, and I doubt he/she (to keep all you lawyers guessing) could examine more than four sets a day. Different skills, training, roles and experience equal different results.

Amendments

7 Time limits on amendments refuse to go away. The unprofessional attempt by some issuers to place a time limit on the beneficiary for the acceptance or rejection of an amendment has crept back.

Although this practice was squashed following the publication of the Position Papers post-UCP 500, it is now widely reported to have been seen again. Bad practice can be stopped by aggressive action - refusal to participate in transactions reflecting bad practice is the easiest and most effective way to do so. This author hopes issuers will decline to issue, and advising banks will simply decline to advise such credits rather than to participate in an exercise which will inevitably lead to litigation claims by beneficiaries ("You should have told me about this and what it means and why it is disadvantageous to me") and applicants ("You should have told me how I can trick my trading partner into something by use of this dubious practice").

On board

8 "On board" means "on board." The distinction in UCP 600 articles 19 (formerly referred to as "multimodal" transport documents) and 20 (port-toport bills of lading) regarding the requirement for an article 20 document to evidence "on board", and an article 19 document not to mandate the same, has led to several interesting side discussions on bulletin boards, most of which fail to take into account the last sentence of UCP 600 article 1, which explicitly states that the rules can always be "expressly modified or excluded by the credit". The net result is that a credit specifically requiring an article 19 document to evidence "on board" a maritime vessel at the named port of loading must, indeed, evidence the same.

ISBP

9 Understanding the ISBP (ICC Publication No. 681) and "international standard banking practice" as used in article 2 of UCP 600 require the practitioner to know what the rules are (the UCP), what the credit states AND how the UCP, the ISBP and international standard banking practice apply to the credit. Gary Collyer, in his interview in the last issue of DCInsight (Vol. 14 No. 2), commented effectively on the difference between ISBP Publication No. 681 and the phrase "international standard banking practice" as used in UCP 600 article 2. The article is a "must read", and I summarize a portion of it as follows: international standard banking practice includes ISBP, subsequent ICC Opinions, DOCDEX Decisions and regional practices that become international practice due to their cross-border nature.

The durable L/C

10 With apologies to Mark Twain, who wrote in 1897 that "... reports of my death have been greatly exaggerated", it pays to remember that letters of credit have stood the test of time - from the earliest clay tablets promising payment by wealthy merchants to the highly automated, encrypted and almost instantaneous computerized messages of today, and to the yet-to-be-dreamed-of credit of tomorrow - and that the need for an instrument from a neutral paymaster will remain with us.

Donald Smith is Vice President, Client Services at Norman Technologies in North Carolina (US) and Chair of the Banking Committee of the United States Council for International Business. The views herein are strictly his own. His e-mail is don.smith@normantech.com