ISSUE 11 Aug2007 Documents are arriving ……….. how to apply articles 15-17 By Gary Collyer As documents start to arrive under documentary credits subject to UCP 600, it is an opportune time to focus on some of the issues pertaining to articles 15-17. In further editions of this newsletter we will look at issues surrounding invoices and transport and insurance documents. Articles 15 and 16 are at either end of the spectrum with regard to presentations – those that comply (article 15) and those that do not (article 16).Again, we look at the issues that have arisen from a corporate and bank perspective. Bank issues Article 15 Does the content of article 15 mean that the issuing bank, confirming bank or nominated bank must honour or negotiate 'immediately' they find the documents to comply? Article 15 was introduced into UCP 600 to bridge a perceived gap that existed within UCP 500, i.e. from the point where the issuing bank, confirming bank or nominated bank determine that the documents comply to when do they have to effect settlement? Under UCP 500 a bank had a reasonable time not to exceed seven banking days following the day of receipt of the documents to determine compliance. If the bank made the determination of compliance on day 1 or 2, when were they expected to effect settlement? In reality, most went on to complete the settlement process as a natural progression to handling the transaction; whilst others waited, some up until the seventh banking day or beyond. It should be noted that each of the sub-articles starts with the word "when". Use of the word "when" should not, however, be taken to be that second, minute, hour or, even, that day. In most cases, the terms and conditions of the documentary credit will determine the point at which honour or negotiation is actually possible. For example, the documentary credit may include a delayed reimbursement period which will restrict the value date that the bank will be able to effect settlement. Depending on the period, the beneficiary could, of course, request earlier settlement less interest for the intervening period. Similarly, banks will have cut-off time to which they must adhere for processing transactions. Article 15 makes it clear to banks that where document examination is concluded prior to the maximum period of five banking days following the day of presentation they do not have a form of 'grace' period up to the maximum period. It is recognised that in a large number of cases it will not be possible for presenters to determine when the examination process was concluded. However, establishing the principle that honour or negotiation follows determination of compliance is necessary for the rules. Linked to the requirement to honour or negotiate, for a confirming bank and a nominated bank, is a requirement that at the time of such honour or negotiation the documents are forwarded to the issuing bank or confirming bank (during the revision process a number of issuing banks complained that nominated banks were being reimbursed but they were still holding onto the documents for some time). Article 16 What was the rationale for including two new status's for the disposition of the documents when there are discrepancies? First, it is important to understand that whilst little has changed within the overall structure of the article itself, its equivalent, article 14 of UCP 500, was the number one article for requests for opinions from the ICC Banking Commission. In addition, these requests resulted in the issuance by the ICC of a paper entitled “Examination of Documents, Waiver of Discrepancies and Notice under UCP 500” outlining the correct or suggested processing of discrepant documents. This paper actually shaped the re-structuring and focus of UCP 600 article 16. Under UCP 500, there were only two options available for banks in the disposition of documents – hold them at the disposal of the presenter or return them to the bank’s complete discharge. From around the year 2000 issuing banks were incorporating a third option into their refusal notices, words to the effect "….. holding documents at your disposal. Meanwhile contacting the applicant and in the event that we receive an acceptable waiver we shall effect settlement and release documents to the applicant unless we have received instructions from you to the contrary" (or similar). This new wording was seen by a number of courts, quite correctly in my view, as seeking to amend the UCP article 14 within the refusal notice itself. Remembering that article 1 of UCP 500 stated that the contents of UCP 500 were binding on all parties thereto, unless otherwise expressly stipulated in the credit; it is important to note that the requirements of the articles could only be amended by the terms and conditions stated in the credit and not the refusal notice. It was largely due to these court cases that a number of banks chose to incorporate the wording described above within their letter of credit thereby creating a new rule in relation to the handling of discrepant documents. Recognising that where the issuing bank seeks waiver from the applicant, receives a waiver, agrees to accept the waiver, effects settlement and simultaneously disposes of the documents reflects actual practice for most banks (unless they have previously received countermanding instructions from the presenter), sub-article 16 (c) (iii) (b) includes this course of action as one of the two new options. The other option is to follow the instructions that have been given by the presenter. It is quite often the case that a presenter will observe that there are discrepancies within the documents being presented. They may indicate these on the covering schedule (although there is no obligation to do so). Where they are indicated, the presenter may state "in the event that you agree with the discrepancies that we have observed, we would request that you take the following action …………". In this event, if the issuing bank, confirming bank or nominated bank that is willing to act on its nomination, finds the same discrepancies as the presenter and are agreeable to acting according to the instructions given, they will follow them and remark on the refusal notice that they are acting according to the instructions received. Whilst not part of the question, it should be noted that under disposition option (a) there is no longer any reference to "at the disposal of the presenter". These words have been removed due to the incorporation of a new rule under sub-article (e) whereby a bank having provided a refusal and using options (a) or (b) may return documents to the presenter at any point after providing a notice of refusal. In a large number of cases, it is not uncommon that sets of documents remain with banks for an inordinate amount of time and banks should not be held accountable for storage and safety of those documents. Indeed, it has been seen that one or two banks have actually introduced charging the beneficiary for documents held by them beyond a stated period of time. Whilst the option under sub-article (e) is to return at any time, it is expected that in recognition of any correspondent banking relationship that exists between the banks, a period of notice will be given before they are returned. Sub-article 16 (c) refers to a single notice does this mean that there cannot be follow up refusals under the same presentation? The rule is that there must be a single refusal. If, for example, the issuing bank sends a refusal notice at 12:30pm listing 4 discrepancies, they cannot send another refusal notice at, say, 1:00pm stating that they 'missed off' a discrepancy and there are actually 5 discrepancies under the presentation. The discrepancies listed within the initial message will be considered as the refusal notice for the purpose of the UCP. If documents are found discrepant, a refusal notice is issued and the beneficiary arranges for replacement documents or correction of the discrepancies on the documents that were presented, this is obviously within their right. If discrepancies are found in the corrected documents in relation to the corrected information or data or the corrections have not been made satisfactorily, then the bank may provide a further refusal of the documents based only on the form of discrepancies mentioned in this paragraph. Discrepancies that existed in the original presentation but not observed on first examination cannot be found to be discrepant if appearing within the corrected documents. Bank and Corporate Issues Article 17 Now that part of the ICC decision on original documents has been incorporated into sub-articles 17 (b) and (c), does this mean that the decision is no longer valid under UCP 600? The short answer is no. In the updated version of ISBP the content of the decision appears as an appendix to the main document and it is clearly stated that the decision has equal application under UCP 600. What is to be understood by "unless the document itself indicates that it is not an original"? Sub-article 17 (b) establishes part of the basis under which a bank can determine whether a document is an original (the other part is in sub-article (c)). Under (b), the beneficiary could manually sign each copy of a certain document. By this act they are all originals according to sub-article 17 (b). However, one or more of the documents may be being used as a copy and may be so marked. On this basis, the document is signed (thereby an original) but is marked 'copy' thereby indicating that it is not an original. What is to be understood by "by the document issuer's hand"? In most cases this will cover situations where it is apparent that either data or marking on a document could not have been included by the document issuer. An example of this may be where a document is required to be presented that particular day (due to expiry or last date for presentation), the beneficiary creates the document and forwards it to the nominated bank by fax with a request that they add an "original" stamp or mark to the document. Clearly the document being presented is in the form of a fax and it would not be possible for the beneficiary to have appended the 'original' stamp or mark. What is to be understood by "unless the statement appears not to apply to the document presented"? An example of this would be where a document is issued and is stamped or marked "original". For one reason or another, this document is not presented but a photocopy of that document is. The photocopy will not only convey the data contained in that document but also the stamp or mark "original". That stamp or mark does not apply to the status of the photocopy but to the document that was photocopied. For the photocopy to be treated as an original it would need to comply with the requirements of sub-article 17 (b).