Article

China

What if a nominated bank holds a different opinion from the issuing bank with regard to the examination of documents?

Perhaps it's well to ask first, what is nomination? UCP 600 has no definition of the term, but it does define a nominated bank as "the bank with which the credit is available or any bank in the case of a credit available with any bank". Furthermore, sub-article 6 (b) stipulates: "A credit must state whether it is available by sight payment, deferred payment, acceptance or negotiation." This means that a nominated bank's obligation is to decide whether or not to pay at sight, to incur a deferred payment undertaking, to accept or to negotiate.

Next, by whom is a nominated bank nominated? The definition of "nominated bank" states: "Nominated bank means the bank with which the credit is available or any bank in the case of a credit available with any bank". Therefore, it's obvious that the credit itself determines whether there will be a nominated bank and that the nominated bank is designated by the issuing bank.

Since a nominated bank is designated by the issuing bank, its obligation should be deemed to be on behalf of the issuing bank. Sub-article 7 (a) spells out the obligation: "Provided that the stipulated documents are presented to the nominated bank or to the issuing bank and that they constitute a complying presentation, the issuing bank must honour if the credit is available by:

i. sight payment, deferred payment or acceptance with the issuing bank;

ii. sight payment with a nominated bank and that nominated bank does not pay;

iii. deferred payment with a nominated bank and that nominated bank does not incur its deferred payment undertaking or, having incurred its deferred payment undertaking, does not pay at maturity;

iv. acceptance with a nominated bank and that nominated bank does not accept a draft drawn on it or, having accepted a draft drawn on it, does not pay at maturity;

v. negotiation with a nominated bank and that nominated bank does not negotiate."

There are two points to stress with regard to this language. First, the nominated bank has the right to decide whether it will act as per the issuing bank's nomination. Second, if the nominated bank decides not to act, the issuing bank must honour provided the documents are complying. Consequently, the UCP leaves a nominated bank freedom as to whether or not to accept, but if it does so it must check the documents to make sure there is a complying presentation. After the examination of documents, the nominated bank may pay the beneficiary as per terms and conditions of the credit.

The question remains, what if the nominated bank and the issuing bank have different opinions after having checked the documents? Suppose the nominated bank considers the documents to be complying and makes payment, but the issuing bank refuses to reimburse the nominated bank because it believes the documents contain discrepancies? How are these disputes to be resolved?

UCP 600 is silent on this, and Banking Commission Opinion R 259, which concerns negotiation with recourse to the beneficiary, says in its conclusion: "The inclusions of conditions under which a bank will offer negotiation, with or without recourse, are not for the ICC to arbitrate." The result can be a hidden problem for the nominated and issuing banks, even though UCP 600 clearly stipulates in article 14, "Standard for Examination of Documents" that banks may come to different conclusions after examining documents.

It is not easy to find a single global standard for examining documents, particularly during a global financial crisis. Moreover, unlike under a negotiation credit, a nominated bank that acts to pay at sight, or incur a deferred payment undertaking or accept has no right of recourse to the beneficiary. Under these circumstances, if a nominated bank, having forwarded documents to the issuing bank to claim reimbursement, may, if reimbursement is refused, decide that it will no longer act as a nominated bank. If this problem cannot be solved effectively, I fear that fewer and fewer banks will be willing to act as nominated banks. This, in turn, will not facilitate L/C transactions and will have a negative impact on the development of international trade.

One possible solution I'd like to advance is that the issuing bank and the nominated bank could sign an agreement stipulating that the issuing bank promises to reimburse the nominated bank if it has fulfilled its obligation to check documents in the standard way. In case of its failure to carefully check the documents, the nominated bank would then bear the burden of any resulting risks. If the issuing and nominated banks still hold different opinions about the documents, they could then refer the dispute to an agreed third bank for a final examination. The third bank's decision would then be binding on both the issuing and nominated banks.

Wangxuehui
Lecturer in the Department of International Trade Anhui Agricultural University, Hefei
E-mail: ofeiliya@hotmail.com

Dubai

The last quarter of 2008 began optimistically with high hopes of a bright future for Dubai in light of the thriving property market and the government's impressive development programs. Financial turmoil around the globe and the impending recession seemed a distant problem for the West. But within two months it all unravelled in Dubai as well. The sudden collapse of the booming property market and the crash of commodity prices triggered a financial crisis that sapped Dubai's economy of much-needed liquidity, resulting in a downturn in trade volume. Clearly, we are witnessing globalization's first financial crisis.

As the recession deepens, the Dubai trading community is finding it extremely difficult to finance their operations, as the once buoyant financial sector now faces some of its toughest challenges to date. Lack of access to liquidity and consistent market volatility are causing financial institutions to re-evaluate their priorities and reassess their business strategy.

But liquidity is only a part of the problem; lack of confidence is a major factor contributing to the deepening crisis. This is not surprising in view of the fact that some of the largest banks in the world have folded like nine pins. The crisis has undoubtedly increased the risks of trade finance. The tumbling prices have seen a spate of rejections of documentary credit presentations as traders have looked to wriggle out of their commitments on the basis of flimsy/fabricated discrepancies. Risk of fraud has also increased manifold, and we have come across some exotic schemes for generating liquidity through the use of letters of credit. This definitely increases the need for banks to keep up to date and to exercise heightened levels of due diligence.

The growing mistrust of the banking industry suggests that a more tailored guidance and governance may be warranted in the field. Banks need to create risk assessment programs that enable them to identify measure, monitor and control risks inherent in the products and services they offer. This means identifying certain transactions as high-risk and paying particular attention to these transactions. More importantly, there is a need to encourage bank personnel to gain more insight into the transactions they handle and the parties involved, and not to be afraid to ask questions if they see anything unusual.

This March, Dubai played host to the first-ever ICC Banking Commission meeting held in the Middle East. The event turned out to be the biggest and, according to some of the regulars at the meeting, the best-organized ICC meeting ever. This is something I can be proud of, as my bank (Mashreqbank) was the main banking sponsor of this outstanding event.

Khalid Iftikhar
Manager Overseas Trade, Mashreq Bank - Dubai
E-mail: khalidi@mashreqbank.com

Pakistan

What distinguishes UCP from other trade rules lies is that they are voluntary codes and do not require states to make them a part of their domestic law. Instead they are contractual rules, a major factor in pushing them to the forefront of international trade rules.

Although UCP 500 was a comprehensive document, ICC recognized that rules and codes of conduct require continuous upgrading to reflect changes in the commercial environment. In particular, with UCP 600, the UCP Drafting Group took the time to make the rules as specific as possible so that controversial constructions of the rules can be reduced to the extent possible.

After more than a year of the new rules, in Pakistan we particularly appreciate several of the purpose-oriented changes introduced to add more specificity. I will cite a few examples. One is article 2's definition of "credit", which provides that the credit means any arrangement whether named or described that is irrevocable and thereby constitutes a definite undertaking of the issuing bank to honour a complying presentation. This definition clearly sets forth that a credit is an irrevocable arrangement and goes on to define the terms "honour", "complying presentation" and "negotiation" to add clarity and specificity to the term.

We also appreciate the new article on interpretations included to ensure consistency in the meaning of terms used in the rules, specifically the terms "on", "about", "from" and "after", etc., when used to determine a maturity date. This is an important addition and should work to resolve much of the controversy surrounding the determination of the exact maturity and payment dates.

In the "Credits v Contracts" article, one more clause has been added to assert the independence principle that the credit is an independent transaction from the sale or other contract and the banks are asked to discourage any attempt on the part of the applicant to make copies of the contract, proforma invoice and the like an integral part of the credit.

I would also cite the new provisions added to the section dealing with availability, expiry date and place of presentation, in particular those stating how the credit is available and the place and that the expiry date of credit should be clearly stated so that accuracy and certainty in the whole credit arrangement can be ensured to a maximum extent. UCP 600 places the confirming bank on the same footing if it adds its confirmation to the credit, and both the issuing and confirming banks will be liable to reimburse the nominated bank if it has honoured or negotiated a complying presentation. Therefore, a safe harbour has been provided to the nominated bank.

Although the UCP 600 has incorporated most of the provisions of UCP 500 dealing with amendments, at the same time it adds two small but significant clauses, one stating that the bank that advises an amendment should inform the bank from which it received the amendment of any notification of acceptance or rejection, and the other that any provision in amendment fixing the time of rejection of amendment by the beneficiary shall be disregarded.

Other substantial changes concern the standard for examination of documents. One particularly welcome addition can be found in two new clauses, one stating that the addresses of the beneficiary and applicant need not be same in the stipulated documents and the credit and the second being that the shipper and consignee of the goods need not be beneficiary of the credit. UCP 500 was mum on most of these issues, which caused banks' reluctance to honour payments if there was any difference of address and if the beneficiary and the consignee were different persons.

We also appreciate the fact that, while adding needed specificity, UCP 600 is a concise and brief document with only 39 articles expressed in simple and exact wording. While no one contends that the new rules will eliminate discrepancies, they nonetheless represent a commitment on the part of ICC to obtain the optimum level of certainty in cross-jurisdictional trades.

Irfan Munawar Gill
Advocate, LLM (London)1
Corporate Lawyer in Irfan & Irfan Attorneys at Law and visiting lecturer at the University Law College, University of Punjab. E-mail: irfangill@hotmail.com