Article

Sub-article 14 (b): can there be "unreasonable conduct"?

by Brooke Wunnicke

UCP 600 Article 14, entitled "Standard for Examination of Documents", is important and lengthy. It has 12 sub-articles, a - l, and this article addresses only sub-article b, which reads:

"A nominated bank acting on its nomination, a confirming bank, if any, and the issuing bank shall each have a minimum of five banking days following the day of presentation to determine if a presentation is complying. This period is not curtailed or otherwise affected by the occurrence on or after the date of presentation of an expiry date or last day for presentation."

The first sentence of sub-article 14 (b) is a welcome change. UCP 500's arguable standard of a "reasonable" time for the paying bank's examination of documents is now a definite measure of allowable time for examination: five banking days after the presentation. The second sentence seems to be simply a confirmation that the nominated, confirming (if any) and issuing bank each has five banking days within which to examine the documents presented to draw down a letter of credit - even if the expiry date or last date for presentation occurs during that five banking day period.

The question is: does UCP 600 sub-article 14 (b) give the bank an automatic and unfettered right to five banking days for examination of documents without any exceptions?

For example, suppose a letter of credit calls for presentation of six documents. On Day 0, the beneficiary makes a timely presentation, but the damaged envelope includes only one document, with its staple broken. Day 4 is the letter of credit's expiry date. On Day 5, the fifth banking day after the Day 0 presentation date and also after the Day 4 expiry date, the bank notifies the beneficiary of a discrepant presentation.

With the damaged condition of the envelope and document at the time of presentation, can the bank prudently dishonour? Would your answer be the same if the damaged envelope contained a group of documents instead of only one document?

I am not a banker, importer, exporter or other business person, but a lawyer. As a lawyer, my view of the questions raised by sub-article 14 (b) may, therefore, differ from that of the reader. Suppose the facts show that the presentation was obviously discrepant but that the presenter did not know about the damage. I conclude that the paying bank would not have five banking days to delay notifying the presenter of the discrepancy. Why? To allow the bank not to notify the presenter until after the expiry would, under these circumstances, be obviously unfair.

Second example

Consider another example. Suppose the beneficiary makes its discrepant presentation to the issuing bank four days before expiry. The bank's records note the bank's concern that the applicant is in poor financial condition - not unusual in today's global economy - and will probably not be able to pay its reimbursement obligation. The bank gambles on the history that a large percentage of first presentations are discrepant and does not examine the presentation until the fifth banking day after presentation. If it is not discrepant, the bank will honour the draw on the letter of credit. But if it is discrepant, the beneficiary cannot cure the discrepancy because the credit has expired. And sub-article 14 (b) states plainly that the five-day document examination period "is not curtailed or otherwise affected" by expiry. The issuer gambles by relying on sub-article 14 (b)'s providing an unfettered grant of five days for examination of the presentation. But can the bank be sure to win its gamble?

As a lawyer, I would respond "maybe yes; maybe no". If the five-day document examination period is applied unfairly, as described in the examples above, I submit that "equity" is available to right the wrong.

What is "equity"? It is a key component of the Anglo-American legal systems. The legal system in the United States is based on the US and state constitutions, federal and state statutes and the English legal system, including the so-called "common law", and equity. The English common law had become quite rigid by the 14th century, and the King's Secretary, known as the "Chancellor", took on the task of adjudicating cases that were not within the jurisdiction of the common law courts. The Chancellor's authority extended to cases that stopped the winner in a common law court from enforcing its favourable judgement. Tension arose between the common law courts and the Chancellor's exercise of this "extraordinary" jurisdiction. In 1616, the King of England and his lawyers upheld the power of the Chancellor to exercise his discretion. Today, as in 1616, equity jurisprudence allows the court to do what "reason and justice" require in a particular case. Consequently, flexibility is an obvious benefit of resorting to equity.

Court proceedings in "equity" may provide a remedy for a flagrant injustice attributable to adhering to an erroneous or unjust law or rule. The concept of equity is of ancient origin. Aristotle defined it as an exception to the rule where the lawgiver's pronouncement is erroneous:

"[The equitable is] not better than absolute justice but better than the error that arises from the absoluteness of the statement [of the law]. And this is the nature of the equitable, a correction of law where it is defective owing to its universality." (Aristotle, Nicomachean Ethics, Book V, Ch. 10).

In the US, with the exception of one state (Delaware), legal and equitable jurisdictions are not handled in separate courts: a single court hears claims both at law and in equity. Also, US litigants do not have the right to a jury trial of equitable claims.

Examples of cases involving equitable proceedings include suits for specific performance and suits for injunctive relief, the latter being pertinent to letters of credit.

Western Europe's legal system has its roots in Roman law. Roman lawyers and magistrates developed jus gentium publicum, which became synonymous with equity, namely a system of law that was fundamentally just. I am not familiar with the civil law of Eastern Europe or with Islamic law, but presume that their legal systems also have an area of jurisprudence flexible enough to allow for a just result even if the "regular" law could not be extended to achieve justice in a particular matter

Equity and sub-article 14 (b)

Coming back to UCP 600 sub-article 14 (b), the reader can undoubtedly think of other examples in which it would be manifestly unfair for the paying bank to take advantage of all the five banking days, or the date of expiration or the last presentation date, that sub-article 14 (b) allows for document examination. Although the principles of equity may provide a favourable result for the presenter, that result is available only after seeking help from a court.

Obviously, whenever possible, a cheaper and speedier course to follow is simply to avoid the problem by making an earlier presentation. For example, if the seller makes its presentation 11 or more banking days before expiry, and if the presentation is discrepant, the seller will still have time before expiry to re-present, hopefully doing so correctly. The seller should, of course, make sure that the expiry or last presentation date in the letter of credit is not inconsistent with its ability to obtain the documentation required. Clearly, setting a workable expiry or last presentation date will depend on the factual circumstances of the underlying contract.

Note that equity cannot benefit every beneficiary whose presentation has been rejected because of difficult circumstances or discrepancies. The noted English commentator on the law, William Blackstone, declared:

"[T]he liberty of considering all cases in an equitable light must not be indulged too far, lest thereby we destroy all law, and leave the decision of every question entirely in the breast of the judge. And law, without equity, though hard and disagreeable, is much more desirable for the public good, than equity without law; which would make every judge a legislator, and introduce most infinite confusion; as there would then be almost as many different rules of action laid down in our courts, as there are differences of capacity and sentiment in the human mind." (Blackstone's Commentaries on the Laws of England)

Any rejection of a presentation is clearly "hard and disagreeable" to the beneficiary. The former UCP 500's sub-article 13 (b) had a vague "... reasonable time, not to exceed seven banking days..." . People can easily argue about what is "reasonable". The new sub-article 14 (b)'s clear delineation of the five banking days' window for the examination of documents is certainly less disagreeable.

In fairness to the drafters of UCP 600, the complaints raised against the second sentence of sub-article 14 (b) were also relevant to UCP 500 sub-article 13 (b)'s provision of a "reasonable time, not to exceed seven banking days ... ". Even though UCP 600's sub-article 14 (b) is preferable, the issue of "unreasonable conduct" could still arise. Perhaps it all comes down to a basic question: "Was the presentation fairly handled?" l

Brooke Wunnicke's e-mail is wunnicke@comcast.net