On July 1 the letter of credit community celebrated the first anniversary of the introduction of the UCP 600. Kim Christensen, trade finance business and product specialist, at Nordea in Copenhagen, reviews how successfully the new guidelines have been implemented.
No doubt the UCP 500 revision was a huge task. The drafting group received more than 5,000 comments to the released drafts and almost every single word was changed.
Interesting though it is hard to pinpoint exactly why the revision was started, and why it grew the way it did. It started out as a ‘technical revision’ – with the idea that only a few specific issues needed be fixed.
Nicole Keller (member of the UCP 600 drafting group) had suggested that one reason that it grew from a technical revision into a more fundamental revision was that fixing one thing in the UCP 500 would also affect other articles.
From the second the revision started every corner of the LC community provided their view on what a perfect UCP should include. Perhaps that was one of the reasons why the UCP drafting group addressed a number of ‘key issues” to be considered by the ICC National Committees.
The key issues
The key issues (12 in total) were presented by the UCP Drafting Group after the meeting in the ICC Banking Commission in Dublin June 2005. Here is an overview:
1. On its face
Should the term “on its face” be removed from the UCP? The majority of the ICC National Committees said that it should be removed.
The result was that it was removed from all articles – except UCP 600 sub-article 14(a) – ie, the provision setting the standard for document examination. So the principle still applies.
2. Reasonable time
Should the words “reasonable time” be removed to describe the period of time available to determine if documents comply?
The result was to remove the term and it was replaced with “maximum of five banking days”. It has been discussed if this does in fact include a ‘hidden’ reasonable time rule. This has not yet been tested in a court of law.
Should the rules use the term “parties” or “banks”?
The vote was in favour of banks (as in UCP 500).
4. International Standard Banking Practice (ISBP)
How should the relationship between ISBP and UCP be? The result was that nothing was changed from UCP 500.
5. Deferred payments
Should UCP 600 include a provision authorising nominated banks to prepay deferred payments?
The result was new provisions in UCP 600 with most significant outlined in sub-article 12(b) but also reflected in sub articles 7(c) and 8(c).
6. UCP 500 article 28
Should UCP 500 article 28 be split in three articles or remain as one. The result was to keep it as one, as was the case in UCP 500.
7. UCP 500 article 30
Should UCP 500 article 30 be deleted? The vote was to delete, as it was considered redundant.
8. Capitalised terms
Should defined terms be capitalised? As it turned out, they are not. This does not indicate any material change.
9. New articles
Should any ‘new’ articles be added? Some were suggested – but none were included.
Local insurance companies were to be contacted for comments to the insurance articles. The result of this is uncertain.
From the above it is fair to conclude – that the ‘key issues’ do not represent significant changes to the UCP 600 – apart from the issue of deferred payment credits.
The actual material and structural changes can more or less be boiled down to:
• The inclusion that a nominated bank is authorised to prepay or purchase a draft accepted or a deferred payment undertaking.
• The address and contact details of applicants and beneficiaries.
• The number of days for determining if a presentation is complying
• The status of refused documents
• Some adjustments to the transport documents – including that the name of the master need not be shown where an agent is signing for or on behalf of the master. Also, that a charterer or its agent can sign a charter party bill of lading.
• An insurance document may show reference to an exclusion clause.
Structural changes include:
• The language is easier to read
• New articles on definitions and interpretations
• Removal of redundant phrases
Market reaction to the new UCP
There was really no telling how the market reacted to the UCP 600. Basically, there were two types of reactions.
One was the practical usage, meaning the daily handling of LC operations. The other was discussions on a more academic level carried out by the LC commentators and LC experts.
The practical usage issue
Before the implementation date – banks needed to make adjustments to their IT systems in order to ensure they could handle the two new ways to express the status of refused documents.
Besides that the overall impression is that the main change was that “500” was changed to “600”. For example, the bank officers handling LCs acted almost exactly the same way July 1, 2007 as they had done June 30, barely even noticing which set of rules the issued LC was subject to.
This of course differs between banks and regions, most likely depending of the effort and focus the respective bank has placed in implementing the UCP 600.
Concluding from the practical point of view; the UCP 600 includes only few changes and the implementation has been smooth and easy.
The academic discussion points
Following the international LC commentators, the impression is quite different from what you find at the LC officers.
A number of ‘troublesome issues’ have been on the agenda. Mostly related to interpretation of specific articles, but also regarding a trend that has troubled many banks: LCs excluding certain articles in the UCP 600.
First on some of the main discussions on interpretations of UCP 600 provisions:
• Bills of lading indicating a place of receipt prior to the port of loading indicated by the LC.
One issue heavily debated arises from the changes made from UCP 500 sub-article 23(a) (ii) to UCP 600 sub-article 20(a) (ii).
The wording in UCP 500 provided specific requirements for the ‘on board notation’ when a bill of lading presented under an LC indicated a place of receipt prior to the port of loading stated in the LC.
The new rule contained in the UCP 600 is less detailed and simply says that:
“… indicate that the goods have been shipped on board a named vessel at the port of loading stated in the credit …”
Many LC experts saw the new wording as a change in practice. For example where the place of receipt in the bill of lading is clearly an inland place, it would not require any additional ‘on board’ notation. Still the issue is not fully resolved, but it seems that no change in practice was intended.
The issue of exclusions
The topic of exclusions has been dealt with in many discussions and articles. In DCInsight, Nicole Keller argues that “exclusion clauses may be a side effect of transparency,” meaning that the UCP 600 “provide transparency on what are the liabilities and rights of the parties to a documentary credit”.
The effect is that liabilities become so clear that banks (or perhaps rather the lawyers of the bank) may want to exclude those. What ever the reason, the most popular articles excluded are:
• Sub-articles 12(b) and 7(c)
Authorisation for nominated banks to prepay or purchase before maturity.
• Sub-article 14(k)
The shipper of the goods need not be the beneficiary of the credit.
• Sub-article 14(l)
That a transport document may be issued by any party – as long as it meets the requirements of the transport articles.
• Article 35 (2nd paragraph)
That the risk of LC complying documents lost in transit between nominated and issuing bank lies with the issuing bank.
Concluding from the academic discussions; UCP 600 has opened up for a number of discussions, uncertainties and not fully clear changes.
On the future
Aiming to the future one must expect that the majority of uncertainties are levelled out, but one must also expect new issues to arise. One issue likely to be debated is the new standard for document examination.
According to UCP 500, the standard was set out as follows: “…Documents which appear on their face to be inconsistent with one another will be considered as not appearing on their face to be in compliance with the terms and conditions of the credit…”
The equivalent UCP 600 wording reads:
“Data in a document, when read in context with the credit, the document itself and international standard banking practice, need not be identical to, but must not conflict with, data in that document, any other stipulated document or the credit.”
This issue is a good example of the distance between the practical oriented LC officers and the academic oriented professional commentators. The majority of LC officers do not have English as their first language – and for those such discussion is simply too academic.
It is also expected that some provisions will be tested in court, and that such will be the basis for discussions, even change in practice.
At some point in time, it should at least be considered if the ISBP are to be revised as well in order to reflect the new practices initiated by the UCP 600.
Revising and implementing the UCP 600 was a huge task for the entire LC community. The value of this investment highly depends on what one focuses on:
For some such as the LC officers handling the LCs it may well be business as usual, while for others such as the LC commentators, it may be a jungle of new uncertain practice.
It is arguable how many real changes the UCP 600 includes. On one hand each and every word has been changed, on the other one can argue that there is but a handful of material changes.
What remains is that the cost of this has been enormous, based on the amount of time spend by people all over the world and money for training, IT updates and purchase of brochures (UCP 600 and ISBP), and it is simply unclear what benefits it has brought or will bring the LC community.
There is however one benefit – or perhaps “opportunity” that is often forgotten when discussing the UCP 600 implementation. That is that the revision process has provided the perfect opportunity for the LC banks to come into the picture again.
It was a “once in a decade” opportunity to approach the customers and remind them of the benefits of the LC instrument.