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 1st 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 1st 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 21st 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:
4th 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: 4th 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 20th 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.
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 21st
century” Journal of Business Law p2.
[2] Ibid.
[3] UCP 500
[4] I Carr International Trade Law
(Routledge-Cavendish: 4th 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 11th
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: 4th 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.
[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
[1] I Carr International Trade Law (Routledge-
Cavendish: 4th 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 11th
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.”
[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).”
[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
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: 4th 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: 4th 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 11th 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 21st
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
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