Article


by Wangxuehui (Ofei) and Kim Christensen

In most L/C transactions, when the beneficiary makes its first presen tation, too often the documents are discrepant.

When a presentation is not a com plying one, the beneficiary faces the risk of non or delayed payment as well as discre pancy fees. This can discourage prac titioners from using L/Cs. Worse, a bene ficiary is often frustrated by the fact that a significant number of cited discrepancies are caused by badly issued L/Cs. Most L/Cs are issued via SWIFT, which has set up standard format speci fications. Therefore, it's useful to ask whether the format vis-à-vis the applicable rules is a reasonable one.

Drafts in MT700 format specifications

In the MT700 format, one field specifies the tenor of drafts (42C/Drafts at ... ); another identifies the drawee of the drafts to be drawn under the L/C (42A/ Drawee). The other documents called for by the L/C (i.e., the commercial documents such as the invoice and the bill of lading) normally appear in the field entitled "46A/Documents required". This format often results in a dispute concerning whether or not a draft is a document like those to be specified in field 46A. For example, the L/C may include the following condition: "CONTRACT NUMBER AND SHIPPING MARKS MUST BE QUOTED ON ALL DOCUMENTS REQUIRED." The question is whether this requirement includes the draft, i.e., whether the contract number and shipping marks must be quoted on the draft (given, of course, that a draft is required by the L/C).

Nature of a draft

To answer the above, it is relevant to discuss the nature of drafts.

In ICC Banking Commission Opinion TA.703rev (UCP 600, included in this issue of Insight)1, the L/C included the follow ing additional condition: "ALL DOCU MENTS MUST BE PRESENTED IN ENGLISH, IF ANY DOCUMENT PRESENTED IS NOT IN ENGLISH WE SHALL FORWARD THE PRESENTATION TO ISSUING BANK ON APPROVAL BASIS."

The beneficiary made a presentation including a draft with the text printed in Spanish. The data concerning the amount, maturity date, credit number and the name of the drawee were printed in English. The confirming bank refused because the draft was presented in a foreign language. The ICC Banking Commission concluded in the first part of its analysis: "For the purposes of a clause such as 'all documents must be issued in English', a draft is not to be considered as one of those required documents unless the credit requires the presentation of a draft drawn on the applicant under 'documents required'". The second part of analy sis states: "A draft is to be examined to the extent required by the terms and conditions of the credit, the UCP and applicable local law."

The conclusion of the ICC Opinion is: "The draft was acceptable as issued and presented. In any event, the data inserted in the respective segments of the draft was in English; there is no discrepancy."

The first part of the analysis seems a bit cryptic. It raises the question as to whether there are cases in which a draft is a document subject to document examination. Practice under UCP 500 did not provide a clear answer. For example, DOCDEX Decision No. 226 included the following statement from the Panel of Experts: "The experts are of the unani mous opinion that, while as a matter of principle a difference in the draft between the amount in figures and the amount in letters is a discrepancy that justifies the rejection of the document [emphasis added] ... ". Compare this to DOCDEX Decision No. 260, where a presentation was refused because the draft was not dated. The Panel of Experts did not deem this a valid reason for refusal - although it clearly contradicts ISBP 645 paragraph 132.

These examples reveal clear contra dictions in international standard banking practice as to whether drafts are documents that can be used as grounds for refusals.

UCP 600 subarticle 6 (c) reads: "A credit must not be issued available by a draft drawn on the applicant." This pro vision was changed in the transition from UCP 500, which was worded as follows: "If the Credit nevertheless calls for Draft(s) on the Applicant, banks will consider such Draft(s) as an additional document(s)3."

ICC Opinion R 2054 says that a draft is an "additional document". It concludes: "Considering drafts as additional documents, banks will check such documents on the basis of the terms and conditions of the underlying credit." This means that in the exceptional case in which the draft is drawn on the applicant, it is to be examined on the basis of the terms and conditions of the L/C, which, in turn, indicates that the examination of a draft not drawn on the applicant is subject to another standard for examination and not on the basis on the terms and conditions of the L/C.

Furthermore, since the term "additional documents" is no longer at issue under UCP 600, it is not clear whether Opinion R 205 applies under the new rules. Reinhard Längerich5 and the UCP 600 Drafting Group6 seem to think it does. However TA.703rev (UCP 600) states that a draft is to be examined to the extent required by the terms and conditions of the credit, the UCP and appli ca ble law. This analysis apparently conflicts with Opinion R 205.

The above clearly indicates that when it comes to a draft and how it should be treated under L/Cs, international standard banking practice is far from clear. If it were, there would be no query TA.703rev.

Without a doubt a draft is a document. The term "document" has been (broadly) defined as "writing that provides information" 7. In trade finance see, for example, URC 5228 subarticle 2 (b), which reads: "Financial documents means bills of exchange, promissory notes, cheques, or other similar instruments used for obtaining the payment of money." URDG 7589 defines "document" in Article 2 as "a signed or unsigned record of information, in paper or in electronic form, that is capable of being repro duced in tangible form by the person to whom it is pre sented. In these rules, a document includes a demand and a supporting statement." These definitions do not exclude drafts.

More specific language is found in ISP98[9] Rule1.09 (a), which states: "Document means a draft, demand, document of title, investment security, invoice, certificate of default, or any other represen tation of fact, law, right, or opinion, that upon presentation (whether in a paper or electronic medium), is capable of being examined for compliance with the terms and conditions of a standby." It is important to note that ISP98 views a draft to be similar to an invoice, for example.

Although "draft" is mentioned a number of times in UCP 600, there are no provisions offering guidance on how to examine them. There are, however, a number of paragraphs in ISBP 68110. The ISBP is a publication written to provide guidance for the examination of documents under L/Cs, so the only logical reason for including paragraphs on drafts must be to describe how they are to be examined for document com pliance. Such an examination only makes sense if the discrepancies noted in drafts can be used to refuse the full presenta tion. In Opinion TA 703rev and DOCDEX Decision No. 260 (quoted above), this does not seem to be the case.

ISBP 681 paragraph 21 (a) states that shipping documents refers to all documents (not only transport documents), except drafts, required by the credit. Paragraph 21 (c) further emphasizes that third party documents refer to all documents, excluding drafts but including invoices. This wording seems to indicate that the draft is a special document differ ent from all other commercial documents. But how does one square this with the fact that considerable wording in ISBP 681 is dedicated to describing how drafts are to be examined?

Clearly, ISP98 is more specific and comprehensive as concerns the nature of drafts than the UCP 600 or ISBP 681.

Suggestion by Ofei

To simplify things, I would suggest that SWIFT MT700 format delete fields 42A and 42C. In addition, all documents required including drafts should be listed in field 46A. It is possible to stipulate the specific requirements for the draft, includ ing the tenor and drawee, in 46A in order to avoid disputes. Placing the draft in field 46A would clear up any mis understanding as to whether discrepancies in the draft can be the grounds for a refusal. Thus, the arguments as to whether a draft is a document to be examined by bankers would be eliminated.

Suggestion by Kim

The problems with a draft are related to the fact that it is one payment instrument on top of another. In most cases, there is no real need for a draft. Moreover, the draft is normally added to the L/C by the issuing bank; in L/C transactions it is rarely a document needed/requested by the commercial parties. For this reason it is wrong, in my view, to refuse L/C documents based on discrepancies in the draft.

My suggestions going forward would be:

1. to discourage the use of drafts in L/Cs and to only call for them when there is a real commercial need (bear in mind that documents can be negotiated without drafts11);

2. when a draft (exceptionally) is included in an L/C, a refusal should not be based on issues in the draft;

3. in the ISBP revision agreed to by the Banking Commission in their November 2009 meeting in Brussels, the ambiguities in international standard banking practice concerning drafts should be clarified, so that there is no doubt as to the nature of the instrument and how it is to be treated in L/C transactions.

Wangxuehui (English name Ofei) is a Lecturer in the Department of Interna tional Trade, School of Economics and Trade at Anhui Agricultural University in Hefei, Anhui, China. Her e-mail is ofeiliya@hotmail.com

Kim Christensen is Vice President and Head of Trade Products and Business Relations at Nordea in Denmark. His e-mail is kim.christensen@nordea.com

1. icc document 470/ta703rev (UcP 600). icc Banking commission meeting november 2009.

2. International Standard Banking Practice for the Examination of Documents under Documentary Credits; icc Publication no. 645.

3. UcP 500 sub-article 9 (a) (iv).

4. meeting on 16 may 1995. icc document 470 /735.

5. Documentary credits in practice - second edition - 2009 by Reinhard Längerich, P. 88.

6. Commentary on UCP 600, icc publication no. 680, P. 34.

7. see: http://wordnetweb.princeton.edu/perl/webwn?s=document

8. ICC Uniform Rules for Collections.

9. ICC Uniform Rules for Demand Guarantees, icc Publication no. 758 (in force 1 July 2010).

10. International Standard Banking Practice for the Examination of Documents under Documentary Credits; icc Publication no. 681. see paragraphs 21(a) and 43-56.

11. UcP 600, definition of "negotiation" in article 2.