Article

by Mohammad Burjaq

After UCP 600 came into effect on 1 July 2007, most banks worldwide were ready to implement the rules on day one, and practitioners were looking forward to that implementation.

During the three-and-half year revision period of UCP 500, hundreds of training courses, workshops and seminars were conducted to prepare for the implementation of the new UCP and to provide for a better understanding of the rules.

One principal aim of the new rules was to remove wording that could lead to inconsistent application and interpretation and to reduce the number of documents being rejected under letters of credit - to reinforce the idea that a letter of credit is a means of payment, not a means of avoiding payment and thereby to maintain or increase L/Cs' market share as an accepted means of settlement in international trade.

One key structural change in UCP 600 was the introduction of an article providing definitions, which avoids the need for repetitive text to interpret and apply the rules. "Negotiation" is one of the terms that has been clearly defined after being misused for years.

Despite all the efforts made to provide a better interpretation and application of the rules, the number of documents being rejected is still significant, and some misinterpretations still exist. In this article I will focus on some misused terminologies and incorrect actions or redundant terms still being employed by some bankers and practitioners in our region.

Misused terms, questionable actions

1. The term "negotiation", as noted, is clearly defined in UCP 600. But it is still misused by some bankers and practitioners. In many cases, it is used in lieu of honour, the taking up of documents or presentation. UCP 600 clearly indicates that any bank willing to be a negotiating bank must be sure that the following conditions are fully complied with:

- that there is an L/C available by negotiation;

- that the bank is willing to negotiate (to be the nominated bank under the L/C and to take up that nomination); and

- that the negotiation involves "the purchase of draft(s) (drawn on a bank other than the nominated bank) and/ or documents under a complying presentation by advancing or agreeing to advance funds to the beneficiary on or before the banking day on which reimbursement is due to the nominated bank".

2. Some issuing banks, upon their customers' request, cancel unadvised letters of credit in case the advising bank refuses or is unable to advise an L/C to the beneficiary. They do so without obtaining the beneficiary's consent for such an action. This alters the irrevocable nature of the L/C and ignores the content of sub-article 7 (b) of UCP 600, which states: "An issuing bank is irrevocably bound to honour as of the time it issues the credit."

3. Some credits and amendments stipulate that advising to a beneficiary is conditional upon receipt by the advising bank of its charges and, in that connection, exclude UCP 600 sub-article 37 (c). These actions violate the beneficiary's rights under the credit and ignore the ICC Banking Commission's admonition not to include such conditions.

4. Some banks incorporate in their credits and applications a statement indicating that the credit and the application are subject to UCP 600 and ISBP 681. They do so despite wording in the Introduction to ISBP 681 indicating that "the incorporation of this publication (i.e., ISBP) into the terms of a documentary credit should be discouraged, as the requirement to follow agreed practices is implicit in UCP 600."

5. Several redundant terms are still being inserted in credits, such as the following:

- "Beneficiary's signed commercial invoice established in the name of applicant". This clause should be simply written as "signed commercial invoice", as sub-article 18 (a) already states: "A commercial invoice must appear to have been issued by the beneficiary and must be made out in the name of the applicant."

- "Full set of original insurance policy or certificate covering goods for at least 110% of invoice value." This should be simply written as "insurance policy or certificate", since article 28 already indicates the standard requirements of the insurance document, which includes presentation of the full set of original documents and, if there is no indication in the credit of the insurance coverage required, a percentage of coverage of at least 110% of CIF or CIP value of the goods. Inserting a clause such as "at least 110% of invoice value" could, in some cases, lead to unexpected results, such as presentation of an insurance policy or certificate for an amount less than CIP or CIF value - for example, it shows a deduction of an advance payment or a discount.

- "Full set clean marine/ocean 'shipped on board' bill(s) of lading" should be simply written as "bill of lading". l "Charter party bill of lading is not acceptable." UCP 600 already does not allow presentation of a charter party bill of lading unless it is called for or permitted by the credit.

- "Charter party bill of lading signed by the charterer and/or the agent of the charterer is not acceptable." The ICC Transport Commission has indicated that signing of a charter party bill of lading by the charterer or its agent has become common transport practice, which is why UCP 600 allows the charter party bill of lading to be signed by the charterer or its agent.

6. "NVOCC bill of lading not acceptable". This or similar language is a reaction to sub-article 14 (l), which allows issuance of transport documents 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 UCP 600. In fact, even though the rule is newly stated, its concept has long existed in practice. UCP 500 did not restrict issuance of transport documents to any party; it only indicated the parties authorized to sign transport documents in the same way UCP 600 does. In any case, such a condition is meaningless and can be disregarded, since there is no bill of lading called an NVOCC bill of lading. However, if it is the intention of the issuer not to allow presentation of a bill of lading issued by an NVOCC and signed by it in the capacity as carrier or as agent of the carrier, the clause should be written clearly to reflect that intention. But the issuer should question how it can recognize the actual capacity of the issuer if the signer of the transport document signs it in the capacity of the carrier or the agent of the carrier.

7. "Forwarders Cargo Receipt (FCR) is not acceptable". The UCP does not consider the FCR to be a transport document and, if an FCR is not required in the credit and is presented by the beneficiary, it will not be examined and will be returned to the presenter. If such a document is required in the credit, it is the issuer's and the applicant's responsibility to indicate the name of the issuing party and the data content of the document.

8. "Third party documents acceptable". For some time, the ICC Banking Commission has discouraged bankers and practitioners from including such a clause, as third party documents are not defined in the UCP. If the term is used, then it must be defined in the credit. If it is not defined in the credit, ISBP paragraph 21 (c) states that it means "all documents, excluding drafts but including invoices, may be issued by a party other than the beneficiary". If it is the intention of the issuing bank that transport or other documents can show a shipper other than the beneficiary, the clause is not necessary because it is already permitted by sub-article 14 (k).

Exclusions

While some bankers and practitioners are inserting redundant and confusing language in their credits, others continue to exclude certain UCP articles they don't approve of. A few of these common exclusions include:

- sub-article 12 (b) (automatic authorization by the issuing bank to the nominating bank to prepay or purchase);

- sub-article 28 (i) of UCP 600 (reference in insurance document to any exclusion clauses); and

- article 35 (loss of documents in transit).

Other writers in DCInsight have discussed the problem of exclusions at length, and there is no need to expand on their commentary. The most important point, in my view, was made by the Banking Commission's Technical Adviser, Gary Collyer, in the Insight interview (April- June 2008). Mr Collyer said: "If some articles are excluded without providing a clear statement of what is required, in some cases the issuing bank will place itself and the applicant in a situation of severe risk, as ultimately they are the ones that face the risk of any ambiguity in the credit." Clearly, ambiguity can result just as much from leaving things out as it can from including redundant clauses which either add nothing of value or create confusion by misusing or distorting language already found in UCP 600.

These are still early days, and a year and a half is not sufficient to judge whether the new UCP will clear up most of the ambiguities found in previous versions of the rules. My view is that UCP 600 is written in precise and lucid language that will stand the test of time. But to fully profit from it, more workshops, seminars and training courses will be necessary to ensure that bankers and practitioners fully understand the thrust of the rules and that the letter of credit will remain a trusted means of payment in international trade.

Mohammad M. Burjaq is Trade Finance Manager/ Corporate Banking at Union Bank in Jordan. He is a member of UCP 600 Consulting Group and the ICC Task Force on Guarantees. His e-mail is cdcsmmb@yahoo.com