Importance of Banking Documents and in particular Documentary Credits in Oil trade is crucial and needs some understanding. So often I come across aspiring "entrepreneurs" in the polite wording, or as it is known in the lay tongue in particular in those regions such as Africa, Middle East or the Far East, Brokers, Middle Men/Women or "business people" whom are under the assumption that just because they have access to someone who is well positioned politically or through family connection have a link to the Oil industry; they will make their millions overnight. I often wonder how they go about this, maybe they search "oil" on Google search engine or go to a fancy club or an event where they have had a drink with someone with a "title". They start bombarding people like me with all sorts of emails. It gets very annoying!

What they fail to comprehend or do not do enough research on is procedures, compliance and a standard approach. For example, we usually ask for a registered company with profile and banks comfort letter preferably from a European registered bank (as a first choice) having said that, amongst other things, one particular interest to us is the Documentary banking credits. What this paper enables is an understanding of UCP600 and the importance of this in the Oil trade. This is also applicable in any trade. The purpose is to make life easier for those who are trading. I hope it helps.

On the 1^st of July 2007, new rules for Uniform Customs and Practice for Documentary Credits came onto force; the rules are called UCP 600. They are a set of principles which standardise banking procedures for financial transaction by means of documentary credits. Such principles are designed to harmonise international trade and facilitate the dealings between merchants in different countries by ensuring payment to the seller for the contract goods or services on the one hand and their delivery to the buyer on the other. Indeed the importance of a documentary credit that enables a bank not only to act as an agent but also as a reliable paymaster, as well enabling both parties security and assurance where they have access to funds in order to go about in their commerce is sacrosanct to a merchant. The importance of this in a time of financial crises and “credit crunch”, with gloomy economic prospect that has not been seen since the last depression is indeed a life blood stagnating international commerce.

There has never been a time where an important legal instrument like the UCP is needed. A documentary credit provides the means for a successful trade. It will make possible credit by enabling finance to be raise where it is needed and provide security for traders especially the smaller to mid-size enterprises who are the backbone of any economy to trade with parties in unfamiliar regions. It will also in enhance the usage of documentary credits and perhaps reduce cost by reducing unnecessary rejections of documents and possibly also ensure a reputational role of banks which has been impaired by the financial crises that was caused by them.

This paper is a critical study of the Uniform Custom Practices of Documentary Credits, it analysis both the revised UCP600 and its predecessor the UCP500, to consider if the shortcomings have been addressed.

Introduction

This research paper sets out to critically analyse and evaluate the changes made to the Uniform Customs and Practice of Documentary Credits (UCP) from the previous incumbent known as UCP 500 to the latest revised version the UCP 600. The changes in the sixth edition are considered to be the most exhaustive review to date, this took more than three years of work by the International Chamber of Commerce’s (ICC) and the Commission on banking Technique and Practice to achieve, hence, it came into force on the 1^st of July 2007.[1]

The main purpose of this change was to address the shortcomings of its predecessor by streamlining the documents from forty nine articles to thirty nine, enabling an improved unambiguous and well structured wording, as well as incorporating the developments in banking, transport and the insurance industry. A fundamental reason for this change was the aim of reducing documentary rejections by banks which can hamper the progressive or expediency of trade by slowing down the process of transactions.[2]

The paper will deal with these aspects by considering the context in the emergence of UCP from a historical as well as its practical implementation. A comparison between the changes from UCP 500 to UCP 600 will be analyzed in order to present a perspective in the advantages and weaknesses of both documents with consideration to any shortcomings.

The paper will also look into the mechanism and functions, and also the law relating to letters of credit. This will present an opportunity to consider the practical implementation and the effects of UCP 600 in its application to international trade. Hence, an opportunity to consider some of the earlier academic commentaries and critique throughout this discourse, as well as to address if there has been any validity to this effect[3]such as Article 12(b)[4]. Furthermore, two cases have come to the courts for litigation which is related to UCP600 and that is the Fortis Bank Case[5]and the China New Era Bank Case.[6] This will be considered.

[1] ICC Uniform Customs and Practice for Documentary Credits 2007 Revision: UCP 600 p.3

[2] LEGAL ANALYSIS: [2007] J.I.B.L.R. p 660

[3] K Takahashi “The introduction of Article 12(b) in the UCP600: was it really a step forward?” [2009]

J.I.B.L.R

[4] See UCP600, Article 12

[5] Fortis Bank SA/NV and Stemcor UK Ltd v Indian Ocean Bank [2010] EWHHC 84 (Comm)

[6] New Era International Ltd. v. Bank of China (H.K.) Ltd. [2010] HKCU 127

1.1 INTERNATIONAL TRADE

In the last 30 years, there has been a dramatic increase in cross-border trading which has led

to a greater need for harmonization of commercial law at the international stage.[1]Such methods at the global level are enabled by conventions and other forms of soft laws that are contractually incorporated uniform rules.[2]These measures have to be delicately incorporated in a contract as trading in the modern era is diverse and complex comprising of various cultures and jurisdictions. The ICC has achieved this “unification” through the efforts and gradual development of the UCP, which was described by Professor RM Goode as the “most successful harmonising measure in the history of international commerce”.[3] Moreover, the unification has been observed by Professor Ellinger whom has been described as a leading expert on letters of credit[4] to state a “consequence of necessity and use of banks as agents in international trade.”[5]Standardsing such banking practices in relation to letters of credit are set of rules that have been issued by the ICC which has been the result of periodic revision since its first publication in 1933. In this chapter we will consider the historical evolution of the UCP and the importance of the letters of credit.

[1] J Ulph “The UCP 600: documentary credits in the 21^st century” Journal of Business Law p1.

[2] R Goode “Rule, Practice, and Pragmatism in Transnational Commercial Law” (2005) 54

I.C.L.Q.539 p521.

[3] See Goode, Commercial Law, 2004, Butterworths. Also Goode on Commercial Law

LexisNexis, 2009.

[4] I Carr International Trade Law (Routledge-Cavendish: 4^th edition 2010) p469.

[5] See Ellinger, Documentary Letters of Credit: A comparative Study, 1970, University of

Singapore Press.

1.2 LETTERS OF CREDIT

Banker’s commercial credits also known as documentary credits and for our purpose referred to as letters of credit have been described as “the life blood of international commerce”. Per Kerr L.J. in RD Harbottle (Mercantile) Ltd v National Westminster Bank Ltd.[1] The primary objective of a letter of credit is to provide secure means of payment for goods and services supplied by a seller to a buyer. This is done by facilitating the transaction between traders in different geographical countries, ensuring payment to the seller for the contract goods or services on one hand, whilst their delivery to the buyer on the other.[2]However, in business it is never that simple, this is due to the long duration in which a cargo is in transit and the distance between buyers and sellers are often in different countries; frequently problems would arise in terms of payment since simultaneous transaction do not take place.[3]

Often the scenario in its simplicity is as follows; in international trade there are always risks which maybe of various types such as the quality, delivery and price of the goods or services conforming to the contract but also the “ability to take and willingness to take credit.[4]Moreover, to illustrate some practicality and every day business concerns: Sellers would naturally want to be paid before giving up control of goods; similarly the buyer would wish to ensure that the goods will be delivered in accordance to the contract before payments are made. Furthermore, the parties may not know each other, there may be delays in transit which means capital will be tied up and if this goes wrong there is cross-border dispute.[5]

[1] [1978] Q.B. 146 at 155.

[2] Richard King Law of Bankers Commercial Credits (London: Europa Publication: 2001 eigth

edition) p 1.

[3] I Carr International Trade Law (Routledge-Cavendish: 4^th edition 2010) p463

[4] J Chuah Law of InternationalTrade:Cross-Border Commercial Transactions (Sweet &

Maxwell:2009 fourth edition) p499.

[5] See above J Chuah p517-518

It is for this reason that financial institutions such as a bank (being an agent and “solvent” paymaster) will reduce the risk of bankruptcy for the seller by using letter of credit. Subsequently the buyer can also stipulate the documents that concern him such as certificate of quality or quantity produced by an independent third party. However, this is where documentary credits can facilitate both parties to raise finance for their transaction. In TD Bailey, Son & Co v Ross T Smyth & Co Ltd[1] Lord Wright describes the functions of the letter of credit as follows:

“The general course of international commerce involves the practice of raising money on the documents so as to bridge the period between the shipment and the time of obtaining payment against documents.”

Thus, the rules and principles for governing such important documents are crucial in international trade having the aid of a legal tool such as UCP to facilitate the use of letter of credits.[2]

1.3 HISTORICAL DEVELOPMENT

The UCP was first issued by the ICC in 1933, and has been regularly revised since, to ensure that it reflects current banking and trade practice. In its initial infancy after its conception and within four years, only thirty-eight countries had adopted it, though at that stage the Commonwealth nations were not part of it, however, this gradually changed after its second revision in 1951, and the membership grew to eighty. By 1962, after the third revision the United Kingdom became a member bringing with her the Commonwealth nations. Subsequent revision of 1974, 1983 and 1994 saw the development of new rules which incorporated the evolution of transport and communication. This continuity and revision throughout the 20^th century has been to set guarantees in the harmonization of various interpretations and the application of the letter of credit, in other words the flexibility and willingness to adapt to changing circumstances made it unique and perhaps enabled the mercantile interest? The difficulties facing the drafters of the new UCP in the attempt to satisfy

[1] (1940) 56 T.L.R. 825 at 828

[2] It should be noted that the UCP has to be incorporated into the contract like INCOTERMS in

order to be legally binding and documentary credit is independent from a sales contract.

the expectations of traders, banks, carriers and other thirds parties is an undertaking which has been significant and should not be underestimated.[1]Such documents like the letter of credit are used in “marginal” settings between parties with limited knowledge between themselves. The UCP “provides a set of privately created rules which are not comprehensive and which, of necessity, are supplemented by national rules.”[2]Therefore, what the drafters created was a set or workable principles that different that parties and their respective countries would find acceptable despite their socio-political and economic differences.

1.3 UCP 600

The UCP 600 is the result of its predecessor[3]which over time became complicated and prone to ambiguity as a consequence many presentations were rejected due to minor discrepancies which raised concerns on the viability of being a secure method of payment. The revised version contains fewer articles with numbers being reduced from 49 to 39 articles, therefore being seen as leaner and more user-friendly than the predecessor and the new UCP 600 applies only to irrevocable letters of credit.[4]Amongst its changes are the introduction of separate articles covering definitions[5]and interpretations,[6]as well as eliminating phrases such as “reasonable time” and “on its face”.[7]One of the stated objectives for the UCP 600 was to “look at the language and style used in the UCP to remove wording that could lead to inconsistent application and interpretation”[8] the new version has adopted a simpler and more concise style of drafting in order to try and remove repetition and ambiguity.[9]

[1] J Ulph “The UCP 600: documentary credits in the 21^st century” Journal of Business Law p2.

[2] Ibid.

[3] UCP 500

[4] I Carr International Trade Law (Routledge-Cavendish: 4^th edition 2010) p469

[5] UCP 600 Art.2.

[6] UCP 600 Art.3.

[7] Appears in relation to the examination of documents in UCP 600 Art.14(a).

[8] UCP 600, Introduction.

[9] Schmitthoff The Law and Practice of International Trade (London: Sweet & Maxwell 11^th

ed 2010) p186.

The definition of the letter of credit at Art.2, provides for the purposes of the rules as “Credit means any arrangement, however named or described, that is irrevocable and thereby constitutes a definite undertaking of issuing bank to “honour” a complying presentation.” To charecterise the nature of the issuer’s obligation the term “honour” has been introduced and is defined at Art.2, as follows:

“Honour means:

(a) to pay at sight if the credit is available by sight payment.

(b) to incur a deferred payment undertaking and pay at maturity if the credit is available by deferred payment.

(c) to accept a bill of exchange (“draft”) drawn by the beneficiary and pay at maturity if the credit available by acceptance.”

Another example, Art.3, states words such as “on or about”, “prompt”, “immediately”, “to”, and “until” often found in documents are to be interpreted for the purposes of UCP 600, thus cutting down on the chances of uncertainty brought about by a variety of interpretation. The UCP 600 contains new articles such as, advising credits and amendments,[1] the effect of nomination[2]and dealing with originals and copies.[3]There are also a number of articles that have been deleted that were in the previous UCP 500 and they include the following:

i) Art.5, instructions to issue and amend, ii) Art.6, revocable credits

iii) Art.8, revocation of credits, iv) Art.12, incomplete instructions

v) Art.15, complying presentation, vi) Art.38, other documents.

The UCP 600 just like INCOTERMS 2000 (now INCOTERMS 2010), does not have the force law in England and needs to be incorporated without which it will not apply. The UK is subject to express terms, and any contradiction in the contract of an express term than it will prevail over the UCP.[4]

[1] UCP 600 Art.9.

[2] UCP 600 Art.12.

[3] UCP 600 Art.17.

[4] Royal Bank of Scotland plc v Cassa di Rispamio delle Provinicie Lombarde ICC No645

2.1 STAGES OF A LETTERS OF CREDIT

Documentary credit arrangement is advantageous to both seller and buyer, the former has the assurance of being paid by the bank in their own country as soon as the stipulated documents are presented, whilst the latter can raise funds from their respective bank on the strength of the documents. The UCP’s were founded to enhance the use of documentary transactions and therefore, the documents are framed in accordance with the different stages of the process of the letters of credit.

Stage 1

Parties to a contract of sale agree that payment shall be made under a letter of credit.

Stage 2

The buyer (referred to as the “applicant”) applies to his bank (known as the “issuing

bank”) and instructs to open a credit in favour of the seller (often referred to as the

(beneficiary”). The issuing bank will usually ask the buyer to complete its standard form

and the applicant will also give details of the documents required, such as transport

documents, invoices, insurance policies, certificate of quality and certificate of origin to

the bank. This will also include the time and place of the documents being presented.

Stage 3

The issuing bank arranges with a corresponding bank (to negotiate, accept, or to pay the

beneficiary’s draft upon delivery of the transport documents by the seller) in the

exporters country to advise, the buyer of the opening of the documentary credit. It is also

usual for the advising/corresponding bank (normally, though not necessarily, be the

seller’s bank) to be asked by the seller to confirm the letter of credit. If this happens then

the bank becomes the “confirming bank” establishing a contract between the seller and

the confirming bank.

Stage 4

On shipment the seller will tender the documents stipulated in the credit, provided that

the correct documents are tendered and this is done before expiry of the credit, the

issuing or confirming bank checks that the documents conform with those stipulated in the

credit and within five banking days make a decision to accept or reject the documents. If

rejected, the seller may re-tender valid documents as long as the credit has not expired (it

is possible for banks to waive certain discrepancies) there is a binding undertaking of the

issuing bank, if the credit is irrevocable and it is confirmed (by a confirming bank) to the beneficiary to pay the purchase price. The above is a contractual undertaking in nature and bank which has committed to this contractual undertaking will refuse to accept from the buyer any instructions not to pay a seller who has performed to the credit,[1] and therefore, will not accept a revocation of the credit.

Stage 5

If the documents are accepted the seller will be paid according to the agreement and they

may be for:

a) Case, payment at sight

b) Electronic funds transfer

c) Deferred payments

d) Acceptance credit of bills of exchange (“drafts”)

e) Negotiation credit

Unconfirmed letter of credit is where the issuing bank will make payment to the beneficiary, likewise where the credit is confirmed. The confirming bank make payments at first instance and it tender the documents to the issuing bank for reimbursement and the issuing bank will reimburse the confirming bank.[2]

[1] Hamzeh Malas & Sons v British Imex Industries Ltd [1958] 2 Q.B. 127

[2] For more details on the letter of credit process, see I Carr International Trade Law (Routledge-

Cavendish: 4^th edition 2010) p471. See also A Malek & D Quest Jack: Documentary Credits

(Tottel: fourth edition:2009) p2,3 and 4.

2.2 AUTONOMY OF THE LETTERS OF CREDIT

Two Characteristics fundamental to letters of credit that establish their importance in international law; the autonomy of the credit and doctrine of strict compliance, both will be considered:

According to the principle of autonomy the credit is separate from and independent of the underlying contract of sale and other transaction. The bank that operates the credit is concerned only with the documents tendered by the seller conforming to those specified in the instructions and is seen the bank’s primary obligation. This separation is explained in Art.4(a), of the UCP:

“A credit by its nature is a separate transaction from the sale or other contract on which it may be based. Banks are in no way concerned with or bound such contract, even if any reference whatsoever to it is included credit. Consequently, the undertaking of a bank to honour, negotiate or to fulfill any other obligation under the credit is not object to claims or defences by the applicant resulting from its relationships with the issuing bank or the beneficiary bank or the beneficiary. A beneficiary can in no case avail itself of the contractual relationships existing between banks or between the applicant and the issuing bank.”[1]

In the Hamzeh Malas & Sons v British Imex Industries Ltd[2]The principle of autonomy is well established in law. Jenkins L.J. remarked:

“…. It seems to be plain enough that that the opening of a confirmed letter of credit constitutes a bargain between the banker and the vendor of goods, which imposes upon the banker an absolute obligation to pay, irrespective of any dispute there may be between the parties as to whether the goods are up to contract or not…”.[3]

[1] UCP 600 Art.4(a).

[2] [1958] 2 QB 127

[3] See also United City Merchants (investments) Ltd v Royal Bank of Canada [1983] 1 AC 168, at

pp182-3; Tukan Timber Ltd v Barclays Bank Plc [1987] 1 Lloyd’s Rep 171, at p 174. The autonomy

of the letter of credit was recently reasserted in Montrod Ltd v Grundkotter Fleischvertriebs GmBH,

Standard Chartered Bank [2001] EWCA Civ 1954

The principle of autonomy favours the banks, the risk is on the buyer, because it cannot be expected that the issuing bank should police the seller’s activities in the exporting country. However, the principle of autonomy is affected in the event of illegality in the underlying transaction or fraud.[1]

2.3 DOCTRINE OF STRICT COMPLIANCE

The doctrine of strict compliance is when a bank is entitled to reject documents which do not strictly conform to the terms of the credit. In Equitable Trust Co of New York v Dawson Partners Ltd[2] Lord Summer said “…. There is no room for documents which are almost the same, or which will do just as well”.[3] The bank is within its rights in refusing documents that do not comply to the particulars specified in the credit, the bank need not concern itself with the legal significance and value of the documents which under instruction it is to demand. In Midland Bank Ltd v Seymour[4] Devlin J, said “..it is not for the bank to reason why..”. Banks are not imputed with trade knowledge and practices, therefore, the documents must meet the specific requirements of the credit. In Seaconsar Far East Ltd v Bank Markazi Jomhouri Islami Iran,[5]the court held that the bank was entitled to reject documents even if the details were trivial.

Art.18(c), requires that the “description of the goods in a commercial invoice must correspond with the credit”, Art.14 (e), on the contrary allow goods in general terms no

[1] The first English case which considered fraud as an exception to principle of autonomy was Discount

Records Ltd v Barclays Bank Ltd [1975] 1 Lloyd’s Rep 444. Mere allegation of fraud was

Insufficient, according to the courts, the fraud must be proven.

[2] (1927) 27 LIL Rep 49

[3] at p 52 above.

[4] [1955] 2 Lloyd’s Rep. 147 at 151

[5] [1993] 3 W.L.R. 756, CA; [1993] W.L.R. 765, HL,.

conflicting with the description of the goods in the credit.[1] However, under Art.30, there are various tolerance in credit amount, weight and value of the goods. For example:

Art.30(a)

“The words “about” or “approximately”, used in connection with the amount of the credit or the quantity or the unit price stated in the credit, are to be construed as allowing a tolerance not to exceed 10% more or 10% less than the amount or the quantity or the unit price to which they refer.”

Art.30(b)

“A tolerance not to exceed 5% more or 5% less than the quantity of the goods is allowed, provided the credit does not state the quantity in terms of a stipulated number of packing units or individual items and the total amount of the drawings does not exceed the amount of the credit.”

Art.30(c)

“ Even when partial shipments are not allowed, a tolerance not to exceed 5% less than the amount of the credit is allowed, provided that the quantity of goods, if stated in the credit, is shipped in full and a unit price, if stated in the credit, is not reduced or that sub-Art 30(b) is not applicable. This tolerance does not apply when the credit stipulates a specific tolerance or uses the expressions referred to in sub-Art30 (a).”

2.4 ORIGINAL DOCUMENTS AND COPIES

International trade is moving at a fast phase with the advent of modern technology and the exchange of information at an instant, the opportunities to seal a deal also depends on the speed a trader can communicate, negotiating and executing such understandings between two parties in order to make it binding depends on the expediency of those information being agreed upon. Often tendering documents that are copies often facilitates the convenience of trading. Uncertainties were created in the previous UCP[2] which seem to have relaxed the rules. This is

[1] I Carr International Trade Law (Routledge- Cavendish: 4^th edition 2010) p480

[2] UCP 500 Art.20(b)

because as a general rule the buyer is entitled to receive original documents. The common rule law is that only originals are acceptable but in the previous UCP documents presented for payment could be said to be original and indicated[1] “that unless otherwise stipulated in the credit, a document produced by reprographic, automated or computerized systems or a carbon copy could be treated as an original if it were marked as original and where necessary appeared to be signed.”[2]In Glencore International AG v Bank of China[3]two arguments were put forward, the first, the signature on the document made it an original and took it outside the purview of Art.20(b), and the second, if the document was caught by the said article, the signature was sufficient to mark the document as an original. The arguments were rejected on first instance and on appeal.

UCP 600 addresses what is acceptable as original for its purposes in much clearer terms that the earlier version:

Art17 provides:

(a)At least one original of each document stipulated in the credit must be presented.

(b)A bank shall treat as an original any document bearing an apparently original signature, mark, stamp, or label of the issuer of the document, unless the document itself indicates that it is not an original.

(c)Unless a document indicates otherwise, a bank will also accept a document as original if it:

(i)Appears to be written, typed, perforated or stamped by the documents issuer’s hand; or

(ii)Appears to be on the document issuer’s original stationary; or

(iii)States that it is original, unless the statement appears no to apply to the document presented.

(d)If a credit requires presentation of copies of documents, presentation of either originals or copies is permitted.

[1] ibid.

[2] Schmitthoff The Law and Practice of International Trade (London: Sweet & Maxwell 11^th

ed 2010) p205

[3] [1996] 1 Lloyd’s Rep 135

3.1 STRUCTURE OF UCP 600 AN OVERVIEW[1]

Article Provision

1-3 General and definitions

4-8 and 14-16 Liability and responsibility of banks examining

presented documents

9-11 Form and notification of credits

12-13 Nominated banks

17-28 Requirements regarding particular documents

29-37 Miscellaneous provisions

38 Transferable credits

39 Assignment (of proceeds)

[1] LEGAL ANALYSIS: [2007] J.I.B.L.R. p 660

3.2 TYPES OF CREDIT

One of the striking features in the revision of UCP 600 is that unless otherwise indicated all letters of credit are irrevocable. This is an advantage to buyers as it guarantees payment from the issuing bank to the seller. In commerce such a rule is not just convenience but assurance and perhaps more to the point encouragement for both buyers and sellers to engage in trade.

Letters of credit are categorised as revocable and irrevocable credits, though in practice, revocable credits are not commonly used. Irrevocability means that the letter of credit cannot be cancelled or amended without the agreement of the issuing bank or the confirming bank and the beneficiary.[1] Any the case of any amendments or cancellation the original terms of the credit will remain in force for beneficiary until such time the acceptance is communicated by the beneficiary to the bank that advised it.[2]

Moreover, there are also the irrevocable confirmed and irrevocable unconfirmed credits as well as other variant credits such as transferable, back-to back, revolving, red clause and green clause credits. The focus for the purpose of this paper is specific and as follows:

a) Irrevocable and unconfirmed

The issuing bank in this type of credit cannot revoke its undertaking to the beneficiary should he present the documents in accordance with the credit.[3]Unconfirmed credits are sometimes preferred to confirm credits often banks charges are less and cheaper. The precarious nature of an unconfirmed credit is illustrated in Cape Asbestos Co Ltd v Lloyd’s Bank Ltd[4]where the confirming failed to inform the beneficiary of the cancellation of the credit. The court held the bank had no legal duty to inform the seller of the revocation.

b) Irrevocable and confirmed

This is a favourable type of letter of credit to the beneficiary as a confirmed credit is always irrevocable, the effect of which has been described in Ian Stach Ltd v Baker Bosely Ltd[5]by Diplock J. as constituting “a direct undertaking by the banker that the seller, if he presents the documents as required in the required time, will receive payment.” In Art.2, the same approach

[1] UCP 600 Art.10(a).

[2] UCP 600 Art.10(c).

[3] UCP 600 Art. 2 and 7(a).

[4] [1921] WN 274

[5] [1958] 2 Q.B. 130.

is taken where confirmation is defined as “a definite undertaking of the confirming bank, in addition to that of the issuing bank, to honour or negotiate a complying presentation”. A confirmed credit gives maximum security to the seller; if the confirming bank is a reputable bank this is payment being received is assured.

3.3 BANKS OBLIGATION

Though a “presentee” bank is not expressly defined in the UCP 600, it is in practice “...regarded as one to whom a party, pursuant to the terms of a letter of credit , tenders documents in order to realise the credit.”[1]Art.14(a) of the UCP sets the standard of examination of documents as follows:

“A nominated bank acting on its nomination, a confirming bank, if any, and the issuing bank must examine a presentation to determine, on the basis of the documents alone, whether or not the documents appear on their face to constitute a complying presentation.”

This is different from the wording of Art.13(a) of UCP 500, which imposed a duty on the presentee bank to exercise “reasonable care” in examining a tender of documents. The questions that is debated is by omitting the “requirement” does it absolve a presentee bank from performing its examination functions in a reasonably careful and competent manner? If not, then to whom is the duty owed and to what extent?[2] The bank is to conduct is to conduct a visual examination and exercise reasonable care.[3]It is said that UCP 600 introduces a “strict liability” on the bank, though some practitioners particularly in England think it is “unlikely to

[1] E Adodo A presetee bank’sduty when examining a tender of documents under the uniform customs and practice

for documentary credits 600 [2009] J.I.B.R 566 p1.

[2] Ibid.

[3] Gian Singh and Co Ltd v Banque de I’Indochine [1974] 1 WLR 1234.

affect what was in any event a restatement of common law position,”[1]the argument is left open as to the absence of the phrase “reasonable care” introduces strict liability.[2]

Five-day rule is one of the major innovations introduced in the UCP 600, this means the banks have maximum of five days for examining the documents: Art.14(b)“A nominated bank acting on its nomination, a confirming bank, if any, and the issuing bank shall each have a maximum of days…” Furthermore:

Art.15

(a) When an issuing bank determines that a presentation is complying, it must honour.

(b)When a confirming bank determines that a presentation is complying, it must honour or negotiate and forward the documents to the issuing bank.

(c)When a nominated bank determines that a presentation is complying and honours or negotiates, it must forward the documents to the confirming bank or issuing bank.

It does not normally take more than three days in England to examine documents, where is no conformity of the documents the bank is free to consult the applicant but this must not exceed the time limit at Art.16(b) states:

“When the issuing bank determines that a presentation does not comply, it may in its sole judgment approach the applicant for a waiver of the discrepancies. This does not, however, extend the period mentioned in sub-Art14(b).”

Combination of Art.14(b) and 16 may reduce the number of documents rejected on first presentation. Documents must link to the cargo and must be identified or it will create grounds for fraud. A large number of documents that were rejected were on the basis of discrepancy ad

[1] Issac and Barnett International Trade Finance – Letters of credit, UCP and Examination of Documents 2007

J.I.B.L.R. 660 P 662.

[2] See I Carr on p 497.

this was a result of inconsistent data between documents.[1]However, it should be noted that Art.14(d) and Art.14(h) may conflict with each other since the former paragraph disregards non-required documents from examination whereas the latter obliges the bank to examine stipulated documents which do not amount to required documents. Parties will have to set their conditions with clarity.

3.4 OTHER DOCUMENTS

In regards to transport documents Art.19 to Art.24 the minor change is that an agent can sign on behalf of the master, and no longer necessary to state the master’s name, though the agent has to be precise on whose behalf he is signing. However, Art. 20 (generally reflects the provisions concerning marine bills loading) is stricter by imposing a signature on the bill of lading rather than the name of the master, it must also indicate that the goods have been shipped on board a named vessel at the port of loading stated in the credit which maybe evidenced by pre-printed wording or board notation to this effect.[2] The form of the signature is flexible with regards to the definition in Art.3

“A document may be signed by handwriting, facsimile signature, perforated signature, stamp, symbol or any other mechanical or electronic method of authentication.”

The new requirement increases the genuineness of the bill of lading without the additional burden on the beneficiary.

[1] See J Ulph p6.

[2] UCP 600 Art.20(a)(i)

4.1 Article 12(b) a critical perspective

In his presentation Professor Koji Takahashi[1] a provision of the UCP that concerns the practically of a business transaction. For example, in the simplest element in a deferred payment credit a bank usually a confirming bank discounts the credit, in practice they make early payment to a beneficiary who has access to cash which enable him to inject the cash into his business and the bank that discounts it makes money on interest till the maturity of the credit. Banks are in a stronger position to negotiate currency rates to even LIBOR rates and will always be in a better position to make money on the interest. The UCP 600 introduced a new provision in Art.12(b), which provides:

“By nominating a bank to accept a draft or incur a deferred payment undertaking, an issuing bank authorizes that nominated bank to repay or purchase a draft accepted or a deferred payment undertaking incurred by that nominated bank.”

In other words the provision is designed in its application to a situation where a nominated bank which has incurred a deferred payment undertaking to discount its obligation before obligation prior to the maturity, but subsequently a fraud by the beneficiary is uncovered. In short, the issuing bank is not relieved of its obligation to reimburse the nominated bank even if the fraud is known before the maturity of the credit. Though the provision has been welcomed as it facilitates the financing of trade for the beneficiary it has according to Takahashi “eliminated a useful option of risk allocation.”[2]

Prior to the introduction of this provision where a nominated bank has discounted its obligation under deferred payment undertaking without the knowledge of fraud, the issuing bank could assert fraud as a defense to a claim for reimbursement by the nominated bank

[1] Koji Takahashi The introduction of Article 12(b) in the UCP 600: was it really a step forward? [2009] J.B.L.R. 285 p1

[2] Ibid.

should the beneficiary commit fraud. Under a deferred payment credit a nominated bank by definition, has the issuing bank’s authority to incur a deferred payment undertaking and to be paid at maturity but, “without a further explicit authorization conferred under Art.12(b) of the UCP 600, it does not have the requisite mandate to pay before maturity.”[1] In the Santander SA v Bayfern Ltd[2]the confirmed what is considered as legal logic[3]and reasoning which has been attested by other cases[4]and is considered no as harsh since banks can nominate their discount rate and under no obligation to make prepayment. The substantial allowed in a deferred payment also allows the issuing bank to investigate any fraud.

Prior to the introduction of Art.12(b) the allocation of the risk of fraud could be between applicant and the issuing bank and on the hand the nominated bank by choosing between the negotiation credit and deferred payment credit. The lack of effective option of shifting the risk of fraud to the nominated bank, brought about by the introduction of Art.12(b) could “hinder the financing of trade.”[5]Though Takahashi acknowledges that the choice between deferred payment credit and the negotiation credit is not a routine market practice, but as it must be said that the new Art.12(b) has “produced the undesirable result of effectively removing a useful option of risk apportionment.

4.2 THE FORTIS BANK

In the Fortis Bank Case,[6]the Indian Overseas Bank (IOB) rejected documents on the grounds that there was discrepancies, the issue was the interpretation of the UCP 600 Art.16(f) which provides as follows:

“If the issuing bank or a confirming bank fails to act in accordance with the provisions of this article, it shall be precluded from claiming that the documents do not constitute a complying presentation.”

[1] Ibid.

[2] [2000] 1 All E.R. (Comm) 776 CA

[3] Ibid.

[4] Singoprain case Credit Agricole Indosuez v Banque Nationale de Paris [2001] 2 S.L.R.1. and the South African

case Vereins-und Westbank AG v Veren Investments 2000 (4) S.A. 238.

[5] Ibid.

[6] 2010] EWHHC 84 (Comm)

IOB gave notice under UCP 600 Art.16(c)(iii)stating that it was returning documents, it was under an obligation to return them promptly, and if it failed to do so Art.16 (f) applied and it was precluded from claiming that the documents did not constitute a complying presentation. The courts had to interpret UCP600 in accordance with its underlying aims and purposes reflecting international bankers and international traders so that it underpinned the operation of letters of credit in international trade. The court implied that if the bank does not receive any instruction shortly after having sent the “hold notice”, it retains documents immediately because in the meantime the beneficiary could amend or rectify them. What this case has underlined is that if the bank does not act promptly and carefully Art.16(f) applies and bank could lose the right to claim even if the documents are not in compliance.[1]

4.3 CHINA NEW ERA CASE

China New Era International Limited v Bank of China (HK)[2]has also been the second major case in relation to letters of credit subject to the UCP 600, here the issue was the obligation of the issuing bank to pay upon presentation of cargo receipt by negotiating bank and whether the cargo receipt was a compliant document. Professor Byrne made the following comments:

“While it may be expected that the documents that are the subject of the negotiation would be complying documents, whether or not they comply has no bearing on whether or not there is negotiation. If the issue or confirmer that undertakes to negotiate fails to note a discrepancy, the negotiating bank will still have negotiated. In that situation, the issuer and any confirmer are precluded from asserting the discrepancy and required to reimburse nominated bank that

has negotiated under the preclusion rule of UCP600 Article 16(f) (Discrepant Documents, Notice and Waiver) even in the event of beneficiary LC fraud.”[3]

[1] L Choo “Preclusion under the UCP 600:banks must act promptly or face the consequences” (2010) Journal of

International Banking & Finance Vol.4 p 249

[2] [2009] HKCU 2012 also see http://law.lexisnexis.com/webcenters/hk/China-New-Era-International-Limited-v- Bank-of-China-Hong-Kong-Limited--Anor

[3] http://www.iiblp.org/files/uploads/pdf/Resources/IIBLP%20Book%20Referenced%20in%20Courts.pdf

It will be interesting to see in the coming years if more cases that come to the courts are in relations to China, as a growing economic super power with State controlled institutions that not only controls foreign reserves but subsidizes its internal market often enabling its exporters and importers to engaging in unfamiliar international trade.[1]

4.4 UCP600 APPLICATION

UCP 600 and its application can be summed up by the following observation made by Issacs and Barnett stated that even though UCP has no force of law, it still purports to codify international banking and practices in relations to documentary credits. “It must be incorporated into letters of credit in order to gain binding (contractual) status.”[2]The parties are given the choice to whether or not to incorporate its provisions.

The application of the UCP600 allows incorporation and derogation, the first being the fact that the UCP600 does not automatically apply to all letters of credit by giving choice to the parties whether or not to incorporate or not part of its provisions in the core of the letter of credit. If the seller decides to incorporate one or several provisions than express reference has to be made to them in the credit.

Where incorporation and derogation are likely to conflict with the terms of the credit for instance where one provision of the credit of the UCP is not clearly excluded, “English Courts will try to find a resolution which gives effect to both without doing too much violence to the language of either.”[3]

[1] This is just an observation from personal experience in dealing with China, too many subsidised company enter global trade without fully knowing the business with access to state credit and lack of understanding of international trade, this is mainly in my opinion the thinking is still communist, observation for future.

[2] Issac and Barnett International Trade Finance – Letters of credit, UCP and Examination of Documents 2007 J.I.B.L.R. Vol 52, No. 3, p1.

[3] See A Malek & D Quest Jack: Documentary Credits (Tottel: 4^th edn: 2009) p15

CONCLUSION

One of the striking features of the UCP 600 has been the intensity of the consultative process which has involved wide ranging drafters from different professions worldwide. In my opinion it is too early to judge the success of the UCP 600, amongst the early criticism were that it was going to be expensive to implement such as staff training and changes in computer software as well as difficult to advise clients of specific issues, the linkage between documents: strict requirements that documents must not be inconsistent with each other could have been dropped. By and large the drafting group worked not on substance but many details precluding an efficient functionality of the UCP.

The structure and wording of the UCP is more straightforward than its predecessor, it is a streamlined cleaner and leaner documents which will enhance trade. Amongst the many improvement one particular practical improvement is that it is no longer required to name a specific port, rather an area. For example, in the oil trade often it is convenient not to mention a specific port but to generally say Mediterranean ports or ARA (Amsterdam, Rotterdam Antwerp) in other areas like east coast of north America, such flexibility has meant that traders will have more room to negotiate and the flexibility to utilize better trade deals.

In the current global climate with financial crises in Europe and slow down in many of the developed economies opportunities will have to be created in new markets in particular those which are considered as high risk or developing. It is from this that we will witness the benefit of the UCP in its application and also where if any potential litigation will arise. This is because opportunities come from areas where the merchants are not familiar with each, therefore, a reliable paymaster such as a bank will facilitate this especially at a time when even the banks are having problems this will enhance their role as an agent and a trustworthy medium something which I am sure they would prefer in light of the banking crises.

In short, whenever time is taken to draft legal documents, especially with consultation made to wide range of industries in this case traders, bankers, insurance amongst others, there is always a good chance of success as it would been an improvement and progressive.

Bibliography

ICC Uniform Customs and Practice for Documentary Credits 2007 Revision: UCP 600.

I Carr International Trade Law (Routledge-Cavendish: 4^th edition 2010) p469.

Richard King Gutteridge and Megrah’s Law of Bankers Commercial Credits (London: Europa Publication: 2001: eight edition)

J Chuah Law of InternationalTrade:Cross-Border Commercial Transactions (Sweet &

Maxwell:2009 fourth Edition)

Schmitthoff The Law and Practice of International Trade (London: Sweet & Maxwell 11^th ed

2010)

A Malek & D Quest Jack: Documentary Credits (Tottel: fourth edition:2009)

ARTICLES

LEGAL ANALYSIS: [2007] J.I.B.L.R.

K Takahashi “The introduction of Article 12(b) in the UCP600: was it really a step forward?” [2009] J.I.B.L.R 285

J Ulph “The UCP 600: documentary credits in the 21^st century” Journal of Business Law

R Goode “Rule, Practice, and Pragmatism in Transnational Commercial Law” (2005) 54 I.C.L.Q.539

Goode, Commercial Law, 2004, Butterworths.

Goode on Commercial Law LexisNexis, 2009

Ellinger, Documentary Letters of Credit: A comparative Study, 1970, University of Singapore Press

E Adodo A presetee bank’sduty when examining a tender of documents under the uniform customs and practice for documentary credits 600 [2009] J.I.B.R 566

Issac and Barnett International Trade Finance – Letters of credit, UCP and Examination of Documents 2007 J.I.B.L.R. 660 P 662

L Choo “Preclusion under the UCP 600:banks must act promptly or face the consequences” (2010) Journal of International Banking & Finance Vol.4 p 249

Dean Miah

Tuesday, 4 December 2012

An Englishman in Riyadh

UCP600 and the Importance of Documentary Credits in International Oil Trade

Introduction

Bibliography

ARTICLES