Article

By Kim Sindberg

Earlier this year ISBP 745 was approved by the ICC Banking Commission. Revising a publication like the ISBP is a huge task, so there must be solid reasons to do so.

One main reason was to reduce the number of discrepant presentations made under documentary credits. And no doubt ISBP is a good educational document. It, together with UCP 600, creates a foundation for good and workable documentary credits and for professional examination of the documents. ISBP 745 covers a magnitude of situations and guides practitioners to the correct outcomes.

Last Opinions

During the last meeting of the ICC Banking Commission in Vienna (21-25 October 2013), seven Opinions were approved - and are hereafter "Official ICC Opinions" .

The reason these Opinions are mentioned here is that they put ISBP 745 into a somewhat painful context. They remind us that we can draft rules and practices forever, but nothing will ever change if the quality of the issued documentary credits, the document examination and other steps involving the handling of documentary credits do not improve. No matter how well the ISBP or UCP is drafted, it cannot cure bad banking practice.

Below are some examples of such practice picked from the Opinions approved in Vienna:

Opinion TA 787

This was a documentary credit that included the following requirement: "B/L presented in incomplete number of page(s) is not acceptable".

The Commission's analysis in the Opinion says: "the requirement in the credit for 'B/L presented in incomplete number of page(s) is not acceptable' is unclear as to the exact intention."

That is indeed correct. What did the wording actually mean? Did it mean that the full set of documents must be presented? If that is the case, then this was an unnecessary requirement, as this is already required by UCP 600 sub-article 20 (a) (iv). Was the requirement related to attachments or riders? This would not be necessary, as this is covered by ISBP 745 paragraph A24.

So, this is a documentary credit that included a requirement the reason for which one can only guess.

After presentation of the documents, the issuing bank refused them, citing the following discrepancy: "Bill of lading presented in incomplete number of page(s)". The refusal was qualified by the issuing bank as follows: "Full set charter party bill of lading presented has indicated 'Page 01' at the reverse side of the B/L but the front page did not indicate 'Page 02' to declare it was the 2nd page of the B/L."

Anyone who knows a little about sea transport knows that it is quite common to see wording like this. The purpose is to underline that the page covering the terms and conditions of the carriage is page 1; i.e., the page that contains the general terms and conditions of the contract of carriage.

For that reason, it is a wrong refusal. In other words, this was a case riddled with bad banking practice. The documentary credit was unclear and ambiguous, and the reason for refusal was wrong.

ICC Opinion TA.789rev

This was a documentary credit that included the following requirement: "Documents must be presented not later than 10 calendar days after credit issuance date".

This looks like a clear and straightforward requirement. But while the documents were presented within 10 days of the issuance date of the documentary credit, the bill of lading indicated an on-board date six months earlier. On that basis, the issuing bank refused the presentation, citing the following discrepancy: "Presented later than 21 days after the date of shipment". In its argument for the refusal, the issuing bank said that while presentation must indeed occur within 10 calendar days of the issuance date of the L/C, the bill of lading called for still must not be more than 21 days old at the time of its presentation, in accordance with UCP 600 sub-article 14 (c).

It is a core principle - reflected in UCP 600 articles 1 and 2 - that when the text in the L/C excludes or modifies UCP 600 provisions, then it is the documentary credit requirement that applies.

Consequently, for this case, as the L/C included a "presentation period rule" different from the one expressed in UCP 600 ar ticle sub-article 14 (c), that article had effectively been modified, and the wording in the documentary credit applied.

What is striking here is that a bank included a somewhat unusual - but clear and precise - requirement in the L/C, and then failed to observe, or even to understand the consequences of that requirement when performing the document examination. That is bad banking practice.

ICC Opinion TA.790rev

In this case, a documentary credit included the following requirement: "[The] photocopy of bill of lading will be accepted by us as presented except if not complying with the next two conditions:

1. in case of sea transport, the transport document must indicate IMO ship number of carrying vessel.

2. shipment by a shipping co and/or by ship under sanctions US/EU/UN are forbidden."

After presentation of the documents, the issuing bank refused them, citing the following discrepancy: "Presentation of B/L used with charter party, not foreseen in the SBLC terms".

Again a case riddled with bad banking practice:

1. What does it mean that a document "will be accepted by us as presented except ... "? There exists no standard definition, and surely the definition applied by the issuing bank was different from that of the ICC Banking Commission. It is bad banking practice to include such unclear requirements - especially when they tangle with the standard for examining the presented documents, which is the main trigger for the issuing banks' obligations under the documentary credit.

2. One of the two requirements to be examined was "shipment by a shipping company and/or by ship under sanctions US/EU/UN are forbidden." Adding a sanctions text in this way, i.e., as a requirement under the L/C, can have severe consequences. The fact that a named vessel is on a sanctions list does not in itself mean that the issuing bank is prohibited from fulfilling its obligation under the L/C.

When a sanctions text becomes a documentary credit requirement, the issuing bank can simply refuse the presentation according to article 16 of UCP 600, regardless of whether there were sanctions in force prohibiting the bank from paying under a particular transaction.

This particular case is even more troubling, as it concerned a presentation under a standby, and shipment had been made a long time before. A vessel may be added to a sanctions list long after goods are delivered to the consignee.

Adding such a requirement to the L/C is very bad banking practice.

3. The presentation was refused citing a discrepancy different from the ONLY two requirements that supposedly were to be examined. Yet another example of bad banking practice.

The above are merely examples, but they are symptomatic of the challenges related to the handling of documentary credits. Only rarely is the problem the wording of UCP 600 or ISBP. Almost always it is badly worded L/Cs or unjustified refusals of presented documents.

As mentioned, one of the main reasons for revising the ISBP is to reduce the number of discrepant presentations. Given that, it is fair to conclude that this only will happen if the banks working with documentary credits improve the quality of their documentary credits and their examination of documents. n

Kim Sindberg is a trade finance consultant. His e-mail is kim@kimsindberg.com