The writer has conducted numerous seminars since November 2006, ranging from the USA to China and all continents in between. Despite the range of countries and their differing attitudes towards documentary credits, a number of areas within the UCP 600 have led to quite consistent questions and discussion.
These questions and discussion points can be compiled under two distinct categories (1) corporate issues (2) bank issues.

The next sequence of newsletters will look at these issues in relation to this categorisation.

Corporate issue

The first issue I will outline relates to article 4 and, in particular, new sub-article (b). This sub-article reads "An issuing bank should discourage any attempt by the applicant to include, as an integral part of the credit, copies of the underlying contract, proforma invoice and the like."

This wording, despite certain concerns, does not stop an applicant from describing the goods in the credit as "[description of goods] as per proforma invoice no. 1234 dated 1 July 2007". The wording of sub-article 4 (b) looks to 'discourage' applicants from requesting that an issuing bank actually sends a copy of proforma invoice no 1234 dated 1 July 2007 to the advising bank as an integral part of the credit.

The whole issue of sending such documents and stating that they form an integral part of the credit has been a problem for many years; some banks agreeing to such request, others resisting. The purpose of sending such a document is often seen to be that the nominated bank will effectively 'tick off' the goods description in the presented invoice against that which appears in the proforma.

But is this solely what is expected when a proforma is sent as "an integral part of the credit"? What of the other information that appears in the proforma; what if there are conditions in the proforma that are not stated in the credit; or, there are conditions in the proforma (which is stated to be an integral part of the credit) that conflict with the terms and conditions of the credit? These are often issues that are overlooked in the belief that attachment = review of goods description only – but is that what is being said when the credit refers to the proforma "as an integral part of the credit"?

The bottom line to this issue is really "what purpose is achieved by attaching a copy of a proforma or contract as an integral part of the credit?" If the applicant is under the impression that 'ticking off' line item detail of a goods description offers some form of comfort or security in the receipt of the ordered goods, according to the standards or quality required, then this would seem to be flawed. The fact that a bank checks the goods description between that shown in the credit and the proforma against the invoice is purely a cosmetic review without any substantiation that the goods listed in the invoice, and compared to that quoted in the proforma, have actually been shipped or are as stated in the invoice.

Determination of the right standard or quality can only be achieved through the documents called for in the credit i.e., inspection certificates, certificates of analysis, survey reports and the like, and the requirement for the right data to appear in those documents.

The wording in sub-article 4 (b) uses "should discourage" rather than "must not" in relation to the attachment of proforma invoices or contracts. This is because banks allow such actions to take place and advising banks comply with that request in advising the credit. Banks should question what the applicant is seeking to achieve through such a request and offer a better and more logical alternative through the structure of the credit and the documents called for.

Suggested action point: where banks have clients that request such an attachment, discussions should be held with their customer to look at the reason(s) and see whether the client is better served by calling for specific documents and the right data content.


Bank issue

The operation of transferable credits has been an issue for many years and whilst it is hoped that the structure of article 38 of UCP 600 will alleviate some of the problems, there are clearly some misconceptions in various countries as to how transferable credits operate. However, it must be stated that these issues are not confined to the content of UCP 600.

Under UCP 500, reference was made to the fact that the transferring bank was under no obligation to transfer a credit. Whilst this was undoubtedly correct, it did not apply solely to the transferring bank. Even though an issuing bank issues their credit stating that it is transferable, they too can be under no obligation to transfer. In circumstances where the transferring bank refuses to transfer, the first beneficiary would need to approach the issuing bank to seek whether they would be willing to transfer. The opening rule in article 38 clarifies this position and refers to "A bank is under no obligation ….." i.e., not just the transferring bank but also the issuing bank.

Sub-article 38 (e) removes the reference to "irrevocably instruct" that was contained in sub-article 48 (d) of UCP 500. Use of terminology that implies irrevocable instructions is linked within the UCP to the obligation of the issuing bank and should not be used in the context of what is a simple instruction from a first beneficiary to the transferring bank in relation to the action to be taken with regard to advising amendments under a transferred credit. All the transferring bank is seeking is an instruction as to when the amendments will be advised, either

(a) simultaneously as they are advised to the first beneficiary or,

(b) only upon specific instructions of the first beneficiary.

Option (b) being the one that is more commonly selected.

The requirement in UCP 500 and UCP 600 is for the transferred credit to include an indication of the instructions regarding advising of amendments. It would seem a large number of banks do not do this or were not aware of the requirement to do so.

Sub-article 38 (f) - which is the equivalent of sub-article 48 (e) of UCP 500 - reflects one of the major changes in transferable credits that occurred under UCP 500. Allowing for each second beneficiary to individually accept or reject amendments created a situation where it was no longer necessary, as was under UCP 400, to seek the combined agreement of each second beneficiary to accept or reject. But, again, some banks were not aware of the implications of such a rule in the UCP i.e., that where there is more than one second beneficiary the potential exists for each credit to be amended differently, with the possible result that the presentation of documents under each of those transfers being created or issued differently.

It will come as no surprise that a lot of banks would have preferred for sub-article 38 (g) to allow more changes to the original credit. The issue with this is that to allow more changes could seriously alter the structure and obligation, under the original credit, of the issuing bank. The inclusion of a requirement that if the original credit is confirmed then the transferred credit must also be confirmed raised some lengthy discussions as this is not how banks in a number of regions have operated in the past. When drafting the new rule, the drafting group were conscious of the wording in UCP 500 which stated that "The Credit can be transferred only on the terms and conditions specified in the original Credit, with the exception of: ……" A request to add confirmation, and the bank requested to confirm so agreeing, was a condition of the original credit. Banks will now need to modify their advices to a second beneficiary, not only in respect of the adding of confirmation (where applicable), but the manner in which the confirming bank’s obligation will be fulfilled.

A number of banks, as has been stated, were keen for more changes in sub-article (g). One questioned why was it that they could not transfer a CFR credit on an FOB basis? They stated that they could issue the transferred credit to the second beneficiary requesting bills of lading marked freight paid and mentioning that freight will be paid outside the credit by the first beneficiary. The first beneficiary would then substitute their invoice and draft. No problem! They are quite right, this could occur and there may be no problem. But there's a "what if". What if the first beneficiary is not available at the time substitution is requested and the second beneficiary documents comply with the transferred credit or, the transferred credit was confirmed? The UCP provides the protection for the transferring bank where it transfers according to article 38 (UCP 600) and article 48 (UCP 500), but in the circumstances outlined the transferring bank is taking the risk and must understand that risk.

The final aspect of transferable credits I will cover in this article is the situation where the first beneficiary fails to substitute their invoices and drafts (if any). A number of banks, again across various regions, have indicated quite bluntly that as an issuing bank they are perfectly entitled to reject compliant documents of the second beneficiary where the first beneficiary fails to substitute. These banks clearly need to read UCP 500 and 600 again. Sub-article 48 (i) for UCP 500 and sub-article 38 (i) for UCP 600.

Suggested action point: applicants and issuing banks involved in the issuance of transferable credit should read article 38 very carefully and understand the implications of issuing such instruments. Particular attention should be paid where there is more than one second beneficiary (possible different presentations under the same credit) and due thought should be given to the possibility that the first beneficiary may fail to substitute documents - where the second beneficiary documents comply. In this event, the issuing bank and the applicant will be required to accept documents that comply with the transferred credit but do not necessarily fully comply with the original credit e.g., lower invoice amount, lower unit price, invoice addressed to first beneficiary instead of applicant.