Article

by Kevin Tam

It is normal practice that an issuing bank or a confirming bank has to advise the nominated bank within five working days whether or not a presentation is compliant. If the issuing bank or confirming bank fails to do so, the issuing bank or the c onfirming bank is then precluded from claiming that the presentation is non-compliant.

Bankers may be surprised to learn that this long-used practice may not be strictly in accordance with UCP 600. This article analyzes the relevant UCP 600 articles and argues that sub-articles 14 (b) and 16 (d) are not applicable to the issuing bank and confirming bank when a presentation has been forwarded to them by the nominated bank for reimbursement.

Sub-article 14 (b)

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 banking days following the day of presentation to determine if a presentation is complying...".

There are three main differences between sub-article 14 (b) of UCP 600 and sub-article 13 (b) of UCP 500. First, the time allowed to examine documents is changed from seven to five days. Second, the phrase "reasonable time" is removed and replaced with "maximum". ICC removed the phrase "reasonable time" because there is not a standard application of the concept globally1.

Third, the phrase "to examine the documents and determine whether to take up or refuse the documents" is removed and a new phrase "to determine if a presentation is complying" is inserted. The replacement was probably made because of the introduction of the term "complying presentation" in UCP 600.

Because of these changes, it is logical to deduce that banks now have a maximum of five banking days to examine documents. However, this author believes the use of the phr ase "complying presentation" changes the interpretation from what it was under UCP 500, and that the new UCP 600 article is not applicable to the situation in which the documents were forwarded to the issuing bank or confirming bank by the nominated bank for reimbursement.

Honouring vs reimbursing

UCP 600 sub-article 7 (a) states: "Provided that the stipulated documents are presented to.... the issuing bank and that they constitute a complying presentation, the issuing bank must honour... " [emphasis added]; whereas sub-article 7 (c) states that: "An issuing bank undertakes to reimburse a nominated bank that has honoured or negotiated a complying presentation and forwarded the documents to the issuing bank [emphasis added].

Note that the word "presented" is used in sub-article 7 (a), and the w ord "forwarded" is used in sub -article 7 (c).

In substance, both words have the same meaning, i.e., sent the documents to the issuing bank, but in fact the words have different implications for the issuing bank due to the context in which they appear in UCP 600.

Article 6 requires a letter of credit to state the nominated bank with which it is available. The nominated bank may be a specified bank or an y bank. Even though a credit is available with a specified bank or with any bank, it is also available with the issuing bank . This means the beneficiar y can bypass the nominated bank and present the documents directly to the issuing bank.

A letter of credit may state that it is available with the issuing bank only and, in this case, the beneficiary or its bank acting on its behalf must pr esent the documents to the issuing bank. In either situation, the documents are presented to the issuing bank, which has an undertaking under sub-article 7 (a) to honour if the documents constitute a complying presentation.

The issuing bank needs to follow the standard for examination of documents as set out in article 14. It has a maximum of five banking days to determine whether the documents are in compliance with the credit. If the presentation is compliant, the issuing bank must honour2. If the presentation does not comply with the credit, the issuing bank needs to follow article 16 and issue a refusal notice to the presenter within five banking days. If it does not, it is precluded from claiming the documents do not comply with the credit.

When documents are forwarded

When a nominated bank honours or negotiates a complying presentation and forwards the documents to the issuing bank, the issuing bank has an undertaking to reimburse the nominated bank. Under sub-article 7 (c), the obligation of the issuing bank is not to determine whether the presentation is in compliance with the credit, but to ascertain that the nominated bank has honoured or negotiated the compliant presentation.

However, the wording of sub-articles 14 (b), 15 (a) and 16 indicates that the articles are applicable to the situation in which the issuing bank has to determine whether the presentation is compliant. The articles do not cover the situation when the documents are presented to the issuing bank for reimbursement, although it is logical to deduce that ICC intended to apply those articles to the issuing bank under sub-article 7 (c). The argument is supported by the judgment of Société Générale SA v Saad Trading3, which stated: "These distinctions between presenting and forwarding and between honouring and reimbursing suggest that Articles 14-16 apply to an issuing bank when documents are presented to it so that it may determine whether to honour them but do not apply to an issuing bank when documents are forwarded to it so that it may determine whether to reimburse a confirming bank which has honoured them4."

Although the judgement only mentions the relationship between an issuing bank and a confirming bank, the principle also applies to the relationship between an issuing bank and a nominated bank. Hence, in my view the issuing bank is not bound to examine the documents and serve the presenter with the refusal notice within five banking days.

The confirming bank

A confirming bank is defined in article 2 as "the bank that adds its confirmation to a credit upon the issuing bank's authorization or request". A confirming bank may also be a nominated bank if the letter of credit is available with the confirming bank. However, this may not always be the case. Sometimes, a bank may add its confirmation to a letter of credit which is available with another nominated bank. Hence, a presentation may be forwarded to the confirming bank for reimbursement or presented to the confirming bank for honour or negotiation.

It appears that the obligation of the confirming bank under sub-article 8 (c) is similar to the obligation of the issuing bank set out in sub-article 7 (c). Following the same argument from the section relating to the issuing bank, the confirming bank is not bound to examine the documents presented to it for reimbursement within five banking days after receiving the documents and, in the case of a non-complying presentation, it is not bound to send the refusal notice within the time set out in sub-article 16 (d).

Case by case basis

How many days can the issuing bank or the confirming bank use to determine whether or not to reimburse the nominated bank? The issuing bank and the confirming bank should not be allowed to use as long as they like, as this could affect the applicant, who may not be able to collect the goods in time. It is also against the interests of the beneficiary, since any unacceptable delay in reimbursement will affect its financial position.

In case the presentation has some curable discrepancies, the beneficiary can correct and re-submit the documents if the issuing bank or the confirming bank informs the nominated bank in time. Consequently, the issuing bank and the confirming bank must notify the nominated bank of its decision within a reasonable time.

What is a reasonable time is determined on case-by-case basis. For instance, in Bankers Trust Co. v State Bank of India5, the documents consisted of 967 pages, and the court held that it was not reasonable to expect the bank to finish the examination within one or two days. The court's decision stated that a reasonable time is not "intended to allow, let alone encourage, an intricate minute-by-minute examination of the issuing bank's work of the kind undertaken here, but rather to require consideration in broad terms whether the issuing bank set about its work conscientiously and, viewed overall, handled the matter with reasonable promptness, either by reference to an appropriate fixed time-limit or generally6."

Conclusion

Although ICC tried to eliminate the vagueness of the term "reasonable time" used in UCP 500, the wording of the new UCP has produced unexpected consequences, namely that the five-day time limitation for documents examination and refusal notice issuance under sub-articles 14 (b) and 16 (d) does not in my view apply to an issuing bank or a confirming bank when it determines whether or not it is bound to reimburse the nominated bank.

Kevin Tam is an accountant. His professional interest is in international trade law, especially documentary credits. His email is kevintam.email@gmail.com

1. Commentary on UCP 600, 2007, ICC Publication No. 680, page 62.

2. Sub-article 15 (a) of UCP 600.

3. [2011] EWHC 2424 (Comm).

4. [2011] EWHC 2424 (Comm) at paragraph 41.

5. [1991] 1 Lloyd's Rep 567.

6. [2011] EWHC 2424 (Comm) at paragraph 41.