Article

by A.T.M. Nesarul Hoque

All of the previous versions of UCP except UCP 600 contained references to revocable and irrevocable credits. Users have moved from one to the other, from UCP 82 to UCP 500, depending on the type of transaction required. Moreover, UCP 600 has shaped every letter of credit transaction under one and unique umbrella, the irrevocable credit. The objective of this article is to analyze whether sub-article 16 (c) (iii) (b) of UCP 600 is in line with "the principle of irrevocability" in a particular credit transaction.

Historical analysis

The principle of irrevocability in UCP has been developed through the various revisions.

According to UCP 290, article 1:

(a) Credits may be either (i) revocable, or (ii) irrevocable.

(b) All credits, therefore, should clearly indicate whether they are revocable or irrevocable.

(c) In the absence of such indication, the credit shall be deemed to be revocable.

Article 7 of UCP 400 incorporated the same principle. Clearly, during the early years of the UCP the revocable letter of credit was more important in trade finance than the irrevocable L/C.

However, with the expansion of international trade and the involvement of more and more people in the trading process, the limitations of the revocable L/C became evident to traders, bankers and other practitioners. In time, it fell into relative disuse, and the irrevocable L/C as an instrument of international trade settlement, with its own features, received recognition in UCP 500, giving it more importance than a revocable credit.

According to UCP 500, article 6:

(a) A credit may be either (i) revocable, or (ii) irrevocable.

(b) The credit, therefore, should clearly indicate whether it is revocable or irrevocable.

(c) In the absence of such indication, the credit shall be deemed to be irrevocable.

UCP 600

Due to very limited use of the revocable L/C, the Banking Commission of the ICC decided to remove it from UCP 600. Now, unless otherwise specified, a credit is irrevocable. According to UCP 600 article 2, "Credit means any arrangement, however named or described, that is irrevocable and thereby constitutes a definite undertaking of the issuing bank to honour a complying presentation." The principle of irrevocability is further emphasized in article 3: "A credit is irrevocable even if there is no indication to that effect", and is maintained in other articles and sub-articles: 7 (b), 8 (b) 10 (a), (b), (c), et seq.

ICC Opinions

During the early days of UCP 500, some issuing banks started to stipulate a deadline for acceptance or rejection of an amendment. In order to halt this kind of wrong practice, ICC issued Position Paper No. 1 and reinforced it in Opinion R 315 (1998/99): "The practices referred to above are seen as changing the irrevocable nature of the documentary credit irrevocable undertaking." Building on the above, UCP 600 article 10 (f ) clearly stipulates that "a provision in an amendment to the effect that the amendment shall enter into force unless rejected by the beneficiary within a certain time shall be disregarded."

In credits issued subject to UCP 500, some issuing banks started to stipulate a condition that "the issuing bank has the right to seek the applicant's waiver and release the documents to the applicant after providing a notice of refusal [if any] without prior permission from the presenter" or similar, effectively modifying the status of the documents when subject to a notice of refusal. Although an issuing bank was empowered by article 1 of UCP 500 to modify or exclude any article or sub-article of UCP, the beneficiary still had the option to decide whether it was ready to export goods under a credit stipulating the above conditions or to seek an amendment. Hence, under UCP 500, there was an option for the beneficiary to play its role with regard to the above stipulated condition in a particular letter of credit transaction.

Sub-article 16 (c) (iii) (b), as an acknowledgement of the standard practice exercised by issuing banks during the lifetime of UCP 500, states that: "the issuing bank is holding the documents until it receives a waiver from the applicant and agrees to accept it, or receives further instructions from the presenter prior to agreeing to accept a waiver".

As we are all aware, after the issuance of notice of refusal by the issuing bank, the presenter (either the nominated bank or the beneficiary) is the owner of the document. Therefore, in order to maintain the principle of irrevocability, the issuing bank should seek the owner's instruction before releasing the documents to the applicant.

However, under UCP 600, if the presenter [nominated bank or beneficiary] forwards the document without stipulating any disposal instruction for a discrepant document and the presentation is found to be discrepant at the issuing bank's counter, the issuing bank is empowered to seek the applicant's waiver and effectively release the documents to the applicant after duly accepting the waiver, unless the issuing bank has received any prior contrary instruction from the presenter as per sub article 16 (c) (iii) (b). This means that after the issuing bank's above-mentioned refusal notice, the presenter's (either the nominated bank's or the beneficiary's) freedom to use its shipping documents is no longer available. Therefore, my view is that the status of the documents mentioned in sub-article 16 (c) (iii) (b) of UCP 600, for the sake of international standard practice, is contrary to the principle of the irrevocability of a credit and ignores the right of the presenter.

In connection with the above, it is worth mentioning that when the issuing bank provides a discrepancy notice by utilizing the option set forth in sub-article 16 (c) (iii) (b), the choice of seeking an alternative buyer is no longer in the beneficiary's hands, although the beneficiary is the owner of the document. The beneficiary has to rely on the issuing bank, i.e., on whether the issuing bank has released the document to the applicant before the beneficiary has sent its instruction.

Nominated banks

Of late, some nominated banks have started to incorporate a statement in their forwarding schedules "to hold the document if issuing bank has observed any discrepancy". The intention of these nominated banks is to prevent the issuing bank from utilizing the option of sub-article 16 (c) (iii) (b) while the issuing bank decides whether to provide a discrepancy notice to the nominated bank. This is so the nominated bank can retain control of the document.

Concerning sub-article 16 (c) (iii) (b), it is interesting to note that the same bank may play two different roles when it acts as an issuing bank and as a nominated bank:

- As an issuing bank, it will tend to utilize sub-article 16 (c) (iii) (b) so that it can seek the applicant's waiver and release the document after receiving an acceptable waiver from the applicant prior to receiving any contrary instruction from the presenter.

- As a nominated bank, it will tend to maintain control of the document.

Conclusion

In my view, the option provided in sub-article 16 (c) (iii) (b) concerning the status of document subject to a discrepancy notice is not only an acknowledgement of standard banking practice, it also sacrifices the presenter's irrevocable rights.

A.T.M. Nesarul Hoque is Executive Officer, Bank Asia Limited, MCB Sk. Mujib Road Branch in Bangladesh. His e-mail is nesarul@bankasia.com.bd