Coastline newsletter / 2007 edition

ISSUE 10 Jul2007

The waiting is over and the real work now begins

By Gary Collyer

By the time you read this newsletter your first UCP 600 transactions will have been processed - hopefully without any problems specific to the wording in UCP 600. The question for many has been "where have the last 8 months gone since the rules were approved?" Last minute changes to LC application forms, systems and literature will continue right up until 30 June and, in some cases, even beyond. The coming months will be a testing time for many - with the implementation of new rules, managing customer expectations, handling transactions under UCP 500 and, for most, the impending vacation period.

Maintaining the theme of the previous three newsletters, we continue to focus on issues that have been raised by corporates and banks. For the majority of this newsletter the centre of attention will be article 14. Once again, you will no doubt recognise that most of the issues are not directly linked to the wording of UCP 600. The issues could equally relate to UCP 500 or general letter of credit practice.

Corporate issues

Sub-articles 14 (b) and (c)

Although the maximum period, for banks to examine documents, has been reduced from seven banking days to five, this is still too long.

This issue has been raised by applicants in a number of sessions who were expressing their desire to obtain the documents as quickly as possible and certainly not on day five or beyond. There are a couple of issues that need to be considered. The maximum period of five banking days is exactly that - a maximum period. Banks will strive to process documents as early as possible and, in some cases, will enter into service level agreements with clients to document their deliverables.

The applicant also has the ability to hasten the delivery of documents. It is surprising how many applicants see the '21 calendar days' presentation period in sub-article 14 (c) as the "rule". This is quite wrong. The "rule" is what the applicant requests to be inserted into the credit, sub-article 14 (c) merely creates the position where the credit is silent. Similarly, 21 calendar days should not be seen as the 'norm' for a credit - today it certainly seems to be so.

Applicants should look at the journey of the goods, the type of transport document being presented and then determine the appropriate period. It is not necessarily so that one stated period, whether it is 21 calendar days or any other period, fits every transaction.

Sub-article 14 (d)

This sub-article has been discussed in other newsletters but the focus here is with regard to the documents that are presented and the, often, excessive data that is included. Under UCP 500, the most common category of discrepancy was 'inconsistent data'. Despite the revised wording in sub-article 14 (d) a large number of discrepancies will still occur every day due to the beneficiary adding information to documents that is not required by the credit, UCP 600 or the document itself.

Often beneficiaries are caught between the quandary of providing sufficient information to their customer and the desire to be paid. Unfortunately, in most cases the two do not always go together. When adding data on a document, there is a very simple question that a beneficiary needs to ask itself "is this information absolutely necessary?" The writer has carried out some research on a number of sets of documents presented under credits and the results show between 40-60% of the data on beneficiary prepared documents was unnecessary.

However, as the information is there the banks must review. In a large number of cases, the discrepancies observed related to data that had nothing to do with the credit but had been transposed differently on various documents. For example, do you always need gross weights, net weights, measurements, shipping marks, name of the vessel and ports of loading/discharge on the invoice??

Sub-article 14 (g)

Why has the option for the bank to forward the additional document without responsibility been removed?

To avoid unnecessary situations whereby an issuing bank may seek to refuse (unjustifiably) due to the data contained in such a document or the data in such document falling foul of any local sanctions or boycott regulations, it was felt that the bank should not be placed in a position where the rules explicitly allow for the forwarding of documents not called for.

The beneficiary may always send the document(s) direct to the applicant should they so wish. The wording in sub-article 14 (g) does allow the bank to make a decision, should it so wish, to forward any additional document but the intent in UCP 600 is that any presentation of documents should only be based on the documents requested in the credit.

Sub-article 14 (h)

Effect of non-documentary conditions

It could be argued that the development of on-line delivery of letter of credit applications has increased the occurrences of non-documentary conditions. When applications were received by mail, banks had to type out the whole text and there was more likelihood that non-documentary conditions would be identified and rectified before issuance.

At the end of the day, if an applicant places a condition in the application their intent is for that condition to be complied with and evidenced in some way. An issuing bank has a duty of care to provide suitable education to their applicants to minimise such occurrences, but this is often difficult to administer and manage on a daily basis.

During the revision process, the drafting group provided a number of variations on the wording including one which stated that non-documentary conditions must be evidenced in any stipulated document. This would have gone some way to removing any issue of ambiguity and the use of the dreaded term "linkage". The national committees of the ICC voted for effectively the same wording that is in UCP 500 today, which does not resolve a problem that has existed for many years and will be there for many more to come.

Bank issues

Sub-article 12 (b)

In what is now often referred to as the solution to the "Santander problem", sub-article 12 (b) provides for the nominated bank to prepay or purchase a deferred payment undertaking that they have incurred or a draft that they have accepted. The big question is how many applicants will exercise their 'right' under article 1 to modify or exclude this rule? Hopefully, not many (if any) as such action will undoubtedly undermine one of the functions of the letter of credit - to provide financing to the beneficiary.

The rule clearly places an onus of 'know your customer [beneficiary]' on the applicant. It has been surprising the number of applicants that were not aware of the existence of this rule, even up to quite recently. A bank would be well advised to point out this rule to their client so that there are no unfortunate surprises at a later date that may affect that relationship.

Sub-article 14 (f)

Are we expected to be experts in every industry to understand if a document fulfils its function?

The simple answer is no. The addition of "appears to fulfil the function of the required document" merely serves to emphasise that where a credit is not specific as to the requirements of a document, the beneficiary cannot present a document with any form of data including data that has nothing to do with the document as titled.

Assessment of a document fulfilling its function can be achieved very easily. For example, a credit calls for "packing list". The document presented by the beneficiary must contain some form of packing data - no matter how brief or exhaustive in detail. That packing data would still be subject to review under sub-article 14 (d) to the extent that it is not conflicting with data in that same document, any other stipulated document or the credit.

Ideally, applicants should be encouraged to specify the details to appear in every document. In most cases, a bank letter of credit application form merely lists the documents (other than invoice, transport and insurance) with a box for 'ticking' to denote a requirement for its presentation but no space for the applicant to include the data that is required. Clearly, if a credit specifies the data that is to appear within a document the principle of the document 'fulfilling its function' does not apply.

Sub-article 14 (j)

Why are different addresses allowed?

Basically, there were two main reasons. First, that in any purchase order or proforma document there may be more than one address that is quoted for either of the applicant or beneficiary. Only one of those addresses can appear within the credit. This does not, however, invalidate any other address for the issuance of documents. Second, it was found that issuing banks often refused documents based on the fact that the address was different not recognising that they themselves had typed the address incorrectly in the first place!

A beneficiary often has a number of addresses - head office, administration, warehouse, shipping etc. and in any presentation more than one of those addresses may appear in the documents presented. UCP 500 actually made no specific reference to the addresses of the applicant or the beneficiary.

It should be noted from sub-article 14 (j) that the rule does not impose a condition that an address must appear on a document - "When the addresses of the beneficiary and the applicant appear in any stipulated document" [emphasis added]. The rule applies where an address is stated. Similar wording is used in the context of when the applicant address appears as part of the consignee or notify party details on a transport document.

 

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