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The Uniform Customs & Practice for Documentary Credits: Is it time for a revision of UCP 600?

Md. Mamonor Rashid                                     

The International Chamber of Commerce (ICC) introduced the Uniform Customs and Practice (UCP) for Documentary Credits in 1933 with UCP 82, in order to alleviate the disparity between national rules on letter of credit practice. Further revisions occurred in 1951 (Publication No. 151), 1962 (Publication No. 222), 1974 (Publication No. 290), 1983 (Publication No. 400), 1993 (Publication No. 500) and, more recently, 2007 (Publication No. 600).

The Uniform Customs & Practice for Documentary Credits (UCP 600) is a bunch of rules established by the International Chamber of Commerce, which pertain to finance institutions which issue Letters of Credit – financial instruments serving companies finance trade.

Bangladeshi and International banks and lenders are subject to this regulation, which aims to homogenize international trade, reduce the risks of trading goods and services, and govern trade.

The UCP 600 (“Uniform Customs & Practice for Documentary Credits”) is the official publication which is issued by the International Chamber of Commerce (ICC). It is a set of 39 articles on issuing and using Letters of Credit, which applies to 175 countries around the world including Bangladesh, constituting some $1tn USD of trade per year.

The UCP 600 rules are voluntarily incorporated into contracts and have to be specifically outlined in trade finance contracts in order to apply. They also allow flexibility for the international parties involved.

An accompaniment to the UCP 600 is the International Standard Banking Practice for the Examination of Documents under Documentary Credits (ISBP), ICC Publication 745. It assists with understanding whether a document complies with the terms of Letters of Credit.

Credits that are issued and governed by UCP 600 will be interpreted in line with the entire set of 39 articles contained in UCP 600. However, exceptions to the rules can be made by express modification or exclusion.

Summary of the UCP 600

Here are a few of the key elements which make up the UCP 600:

  1. Definition of key terms which are prevalent in international trade (e.g. honouring [of payments], applicants, banking days, presentation)
  2. How international trade documents (Letters of Credit) can be signed and acknowledged by all parties
  3. The difference between documents, goods and services (and which parties deal with these)
  4. Which parts of a Letter of Credit are negotiable and non-negotiable
  5. How credit works, and how payment is made
  6. How banks can communicate the confirmation of goods (teletransmission)
  7. Transportation of the goods, modes of transport, and who bears responsibility
  8. How to deal with discrepancies, waivers and giving notice
  9. The provision of original documents or electronic copies
  10. Bills of Lading
  11. Insurance and covering the cost of goods
  12. Loss of shipping documents in transit

The UCP 600 has taken over 3 years to develop

  • there was a 14 year gap between UCP 500 and UCP 600;
  • The consulting group was established with 41 members from 26 countries, who held meetings on over 15 occasions
  • Over 5000 comments were received and reviewed once the first draft of the UCP 600 came about, being unanimously approved in October 2006
  • UCP 600 is doing relatively well and works most of the time, there have been a low number of disputes, usually centered around some ambiguous wording that could not be agreed when the UCP 600 was drafted;

Why further revision is highly required?

Remove reference to drafts: Market feedback from a number of respected trade practitioners is questioning the on-going requirement for drafts in a documentary credit transaction. We have some sympathy for this viewpoint, as a draft under a letter of credit is, ultimately, a redundant instrument. Removing drafts (and negotiation) from UCP would leave the definition of ‘honour’ as simply at sight or deferred payment. The problem likely to be faced in this regard is that drafts combined with documentary credits still have enormous support from certain parts of the world. It should also not be forgotten that whether or not drafts are required is not a UCP issue. It is the case that almost every bank’s application form, whether in paper form or on-line, will contain a pre-set requirement for the presentation of a draft. Whether a draft is required or not is within the hands of every issuing bank and does not need a change to the UCP to achieve it.

Freely available credits:  The problem with a freely available credit is that a bank does not need to be specifically nominated in order to honour or negotiate and present documents to the issuing bank. In such circumstances, it may well be that the nominated bank does not have a relationship with the issuing bank and no KYC / CDD measures would have been completed. This can certainly be a regulatory problem.

Remove negotiation as a form of availability: This issue has been seen in a few suggestions. Such a change would have serious implications for the letter of credit business. The ICC Global Trade Survey 2015 indicated that 72.3% of MT700’s issued in 2014 were available by negotiation (sight or tenor). In 2013, this figure was 70.8%.

Removal of negotiation from the UCP would not stop letters of credit being issued available by negotiation. What it would do is create uncertainty as to its application as banks will create different interpretations that suit their needs at a specific time.

Sanctions: Should a sanctions article be added, or perhaps be included as a sub-article of article 36 ‘Force Majeure’? The current wording does not cover sanctions although, regardless of this, the applicable law will always override the UCP. Having said that, there is an argument that article 36 could be extended in line with URDG 757 article 26, which explains the situation should payment be prevented by a force majeure event.

Exchange control regulations: These are a matter of national law and are outside the rules. Regulations and controls are not standardised globally nor do they remain static. As such, it would not be sensible for inclusion within ICC rules.  UCP 600 sub-article 37 (d) provides for the applicant to indemnify a bank against all obligations and responsibilities imposed by foreign laws and usages. Out of interest, the first version of UCP, publication no. 82, included a disclaimer that banks assume no liability or responsibility for consequences arising out of the interruption of their business by a decision of a public authority. This remained for publication 151 but was dropped for publication 222 and ever since.

Transport: UCP should provide a correct reflection of market conditions, including transport and logistics. Each revision of UCP has responded to a shift in market practice. Logistics has certainly had an impact in this respect; part of the rationale for the UCP 400 revision was containerisation and the need to define transhipment for such a change.  It is, however, questionable as to whether or not there has been sufficient change in this sector to justify a UCP revision. However, the following issue could be a matter for consideration.

Charter Party Bill of Lading: If a credit simply allows for or requires the presentation of a charter party bill of lading (CPBL), a CPBL issued and signed by a carrier or its agent is discrepant under UCP 600 sub-article 22 (a) (i). Some have argued that this is no longer in accordance with evolving practice.

Green / sustainability issues: Initiatives, which are on-going in this field, have been using UCP 600 as a base and no areas of conflict have yet been identified.

Removal of Standby letters of credit: UCP 600 is not particularly user-friendly when it comes to this instrument. The aim with this proposal is that ISP98, which is dedicated to standby credits, be the only set of applicable rules. Whilst there are conflicting arguments as to the way forward, as a stand-alone it is not a compelling reason for a UCP revision. Also, the removal of the phrase “(including, to the extent to which they may be applicable, any standby letter of credit)” from article 1 would not necessarily stop any bank from issuing a standby letter of credit subject to a future revision of UCP.

Inoperative credits: Clarification as to how and when the credit becomes operative. This is partially addressed in UCP 600 article 11 but may need expansion.

ICC observation:

The above list is by no means exhaustive and merely highlights a few of the issues that have been raised. An ICC perspective is that the majority of problems faced under documentary credits are caused by one or more of the following:

  1. a) Poor drafting of the credit;
  2. b) Lack of understanding of documentary credit workflows and the principles of UCP 600;
  3. c) Lack of attention to detail and management of the production, shipment and document collation processes; and
  4. d) Excessive and unnecessary data being added to documents. Each of these problems is surmountable with more training and education (particularly with respect to ISBP 745), not with a UCP revision.

Simple tasks can reduce the above raised discrepancy rates:

  • Improved drafting of LC’s by issuing banks.
  • Thorough review of LC’s by advising / confirming banks to understand the risks and implications.
  • Beneficiaries to clearly understand the implications of providing certain documents and ensure they can meet timeframes and deadlines.
  • Close and constant communication between beneficiary and logistics / document providers.
  • Liaison between all parties in case of unforeseen problems: beneficiary / applicant / banks.
  • Will save time and money if a problem can be addressed prior to presentation of documents.
  • Avoid … to the maximum possible … LC’s that exclude specific articles / sub-articles of UCP.

The Writer is an Associate of Chowdhury Mukimuddin & Associates.  

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