Article

by King-Tak Fung

Although UCP 600 has been in force for over two years, there are still a number of issues that concern trade finance practitioners. This article contains an extract of a commonly asked questions from the book UCP 600 - Legal Analysis and Case Studies and two recent DOCDEX Decisions on the proper interpretation of "negotiation".

"Reasonable time" and five banking days

Whether a bank completes examination of the presented documents within a reasonable time depends on the facts of each case. As there was no objective standard for reasonable time stipulated in UCP 500, beneficiaries often used the term to sue the issuing or confirming bank for delays, especially when the beneficiary had a weak case for claiming discrepancies.

To eliminate the uncertainty and unnecessary litigation, this writer, in the UCP Consulting Group meeting held in Rome, proposed removing the reasonable time concept from the rules. The original idea was to give banks a fixed number of days to complete the examination of documents, during which they would not be subject to any challenge so long as they either paid (for a complying presentation) or issued a refusal notice (for a non-complying presentation) no later than the specified period. Five banking days was the time period subsequently agreed by ICC national committees.

Despite the removal of the term "reasonable time" from UCP 600, sub-article 14 (b) states: "A nominated bank acting on its nomination, a confirming bank, if any, and the issuing bank shall each have a maximum of five bank days following the day of presentation to determine if a presentation is complying... ".

Many L/C practitioners still have concerns that the word "maximum" implies that the issuing or confirming bank may not have a total of five banking days to determine the compliance of each presentation. The writer's view is that the insertion of "maximum" is there to make it clear that banks should effect payment as soon as the document examination has been completed. For example, if a bank finished examining the documents on day one, it should not sit on the documents and effect payment on day five, but should effect payment on day one or day two at the latest. This is in line with sub-article 15 (a) which states: "When an issuing bank determines that a presentation is complying, it must honour."

It would have been ideal if the phrase "without delay" had been added at the end of sub-article 15 (a) instead of using the word "maximum" in sub-article 14 (b), since people who did not follow the UCP revision process closely may hold the view that the "reasonable time" concept still applies under UCP 600.

Nevertheless, the use of the word "maximum" may not prove to be a major issue in practice. There are several methods that banks employ in examining, refusing and/or paying documents. These can be summarized as follows:

Examine documents - find they are complying - pay immediately

This is in line with sub-article 15 (a), e.g., document examination is completed, for example, on day two or three, and payment is effected on the same day. The word "maximum" is irrelevant in this situation.

Examine documents - find they are discrepant - obtain applicant's waiver

It is not uncommon that examination of documents will take two or three banking days, and it may take another two or three banking days to obtain a waiver of discrepancies from the applicant. Accordingly, it is highly unlikely that the issuing or confirming bank would be subject to challenge, even if it takes a total of five banking days to examine the documents AND to obtain an applicant's waiver.

Examine documents - find they are discrepant - reject right away

If the issuing or confirming bank completes document examination on day two or day three and issues a refusal notice right away, the bank need not worry, since it has not utilized the five banking days in full and the word "maximum" is again irrelevant.

Examine documents - find them to be complying - hold payment until the fifth banking day

This is problematic, because once the issuing or confirming bank determines that the presentation is complying (for example, on day two), it should honour without delay and should not withhold the payment until day five. If such undue delay is subsequently discovered by the beneficiary or financing bank, the issuing or confirming bank may be liable for late payment interest for the period from day three to day five.

Examine documents - find them discrepant - hold refusal until the fifth banking day

This could be problematic as well, for example if document examination is completed on day two and the bank neither approaches the applicant for a waiver nor sends a refusal notice until day five. Note that the gist of article 16 is that the beneficiary is entitled to be promptly informed about the status of the presented documents and the decision of the issuing or confirming bank in respect of the documents, so that it can dispose of the relevant goods without delay.

Hold documents but do not examine them until the fifth banking day

Undue delay in processing the documents until day five could be fatal. Unless the issuing or confirming bank can provide good reasons for such a delay - for example, force majeure - it is arguable that the bank could be precluded from rejecting the presented documents, irrespective of whether they contain discrepancies. This is because such undue delay clearly jeopardizes the interests of the beneficiary and is in violation of UCP 600 article 14.

"Negotiation": the proper interpretation

Following my recently published DCInsight article, "Recent stop-payment order cases in China"1, this writer would like to update readers on developments in the alleged fraud cases. In these cases, the plaintiffs attempted to allege the following grounds, among others, in order to disqualify the nominated bank from being a negotiating bank. The nominated bank obtained two ICC DOCDEX Decisions which provide important guidance to the international banking and business communities on the proper interpretation of "negotiation".

- Silent confirmation/without recourse arrangements entered into between the nominated negotiating bank and the beneficiaries are outside the terms of the credit and do not affect or change in any way the issuing bank's reimbursement obligation to the nominated bank that has negotiated the credit. This view endorses the L/C independence principle that each of the contracts related to an L/C is separate from and independent of one another.

- The negotiating bank is not obligated to examine whether the documents have been presented under the same or other L/Cs before. There is no requirement under the UCP for a negotiating bank to verify the relationship between the applicant and a beneficiary, even though the parties may be the related companies of a group or controlled by the same shareholders.

- The nominated bank's funding obtained from other branches for making advances to the beneficiaries do not prejudice the nominated bank's status as a negotiating bank.

- Under a usance L/C, a negotiating bank may advance funds to a beneficiary before or after the issuing bank accepts the presented drafts and/or documents so long as the advances are made before reimbursement is received from the issuing bank.

- A nominated bank that has negotiated a complying presentation should expressly indicate on its document remittance schedule that it has negotiated the documents. However, the absence of such indication does not violate UCP 600. The omission does not affect the nominated bank's status as negotiating bank, nor does it discharge the issuing bank's payment obligations as long as the nominated bank confirms its negotiation to the issuing bank.

- An authenticated SWIFT message issued by the issuing bank to the presenting bank confirming its acceptance of presented drafts and/or documents and the date of payment constitute the issuing bank's undertaking to effect payments to the nominated bank on the relevant due dates, which is affirmed by sub-article 7 (c) of UCP 600.

Since it is not uncommon that some banks will use similar excuses to challenge the nominated bank's status as a negotiating bank in order to avoid their L/C payment obligations, these DOCDEX Decisions provide important guidance about the proper interpretation of negotiation and will hopefully eliminate these flawed arguments in future.

King Tak FUNG is a Banking Partner of Eversheds Hong Kong, a member of the ICC Consulting Group on the UCP 500 Revision and author of Leading Court Cases on Letters of Credit (www.iccbooks.com) and UCP 600 - Legal Analysis and Case Studies (www.peer.com.hk).
His e-mail is ktfung@eversheds.com

1. DCInsight Vol. 15 No.2, April-June 2009.