ISSUE 15 Feb2008 Users voice their concerns and issues with language seen in UCP 600 LCs By Gary Collyer and Jack Chan Jack Chan, Vice President & Trade Technical Advisor, Asia Pacific Operations at Wachovia Bank As part of a new series of newsletters for 2008, we have invited a number of letter of credit experts, from different parts of the world, to offer their initial thoughts, concerns and issues in relation to the implementation and application of the principles of UCP 600. In this first edition, Jack Chan, Vice President & Trade Technical Advisor, Asia Pacific Operations at Wachovia Bank, N.A. Hong Kong Branch provides his insights and we would like to thank him for agreeing to take part and his valued contribution. Where appropriate, comments have been added to agree, offer an alternative position or provide clarification. Since the implementation of UCP 600 on 1 July 2007, we have observed the following: Letters of credit issued under UCP 600 are much longer in content than those issued under UCP 500 and issuing banks look to include many exclusions and special conditions. The banks' intention is obviously to protect themselves but we think some of the exclusions and special conditions are indeed redundant or useless and sometimes misleading. The following are some examples: 1. Useless exclusion: Bills of exchange must be negotiated not later than yy/mm/dd. (Note: It's useless because the credit does not specifically exclude sub-article 6 (d) (i)). Comment: This is an issue that arose under UCP 500 and was addressed in an official opinion, so is not new. The principle in UCP 600 (as well as UCP 500) is one of the expiry date representing the last date for presentation of documents by the beneficiary (or their presenter) and not an expiry date for an event of the bank to occur i.e., negotiation. By stipulating that the bill of exchange (and documents) must be negotiated before a certain (expiry) date is imposing a date prior to the expiry date for the beneficiary to present the documents, the bank to then examine and determine compliance and for the act of negotiation to occur. This is not the intent of the rule in article 6 of UCP 600 and banks should not issue a credit with such a condition. 2. Exclusion not found in UCP 500 LCs but in UCP 600 LCs despite virtually no change from UCP 500 to UCP 600 in that respect: If there is/are subsequent amendment(s) after this credit is issued, UCP 600 sub-articles 10 (c) & (f) are excluded and if beneficiary fails to give notice of acceptance or rejection within the period stated in the amendment(s), it will be deemed that the beneficiary has rejected the amendment(s). Comment: During the revision process, various alternatives were considered in relation to determining whether or not amendments had been accepted or rejected by the beneficiary. In the end, the national committees decided that the language in sub-article 9 (d) of UCP 500 was sufficient and should form the basis of the language in sub-article 10 (c) of UCP 600. ICC Position Paper No. 1 of September 1994 clearly stated that amendments should not contain time limits and this message has flowed through to UCP 600. As you have implied, under UCP 500 banks seemed to accept the stance in Position Paper No. 1 but are now looking to re-introduce a condition that not only affects the irrevocable nature of the credit but also imposes unnecessary requirements on an advising bank to ensure delivery of the amendment, to monitor for a response and provide the response of the beneficiary to the issuing bank, within the stipulated time period. If consent is required within a specified time, then the applicant should be speaking to the beneficiary and asking them to provide the information to the advising bank, for conveying to the issuing bank, without the necessity of a time limit within the amendment itself. 3. Redundant condition: Stale documents presented not acceptable. Comment: The term "stale documents" has no meaning in UCP and any reference to these words should outline what is the intention. If the credit contains a requirement for presentation of documents within a specified number of days (or where no days are mentioned, 21 days becomes the default according to sub-article 14 (c) of UCP 600), a presentation beyond these number of days will be deemed discrepant in any event. 4. Misleading/confusing condition: Freight Forwarder BL presented not acceptable. Comment: The issue here is what is the intention behind the words? Is it merely that the bill of lading cannot be issued on the letterhead of the freight forwarder? If so, this should be made clear in the credit itself. An issuing bank should remember that this clause could be inserted in a credit but if the freight forwarder issues a bill of lading on their letterhead and signs as carrier, then the bill of lading is a carrier document. 5. Unacceptable condition to the beneficiary or the nominated bank: Notwithstanding the provision of UCP 600 article 35, the issuing bank of this credit will not reimburse the nominated bank (or confirming bank if any) when the documents required have been lost in transit between the nominated bank (or the confirming bank) and the issuing bank. Comment: Issuing banks that insert this language into their credits should also consider the implications where they are the nominated or confirming bank and the condition is inserted in the credit that they have received. The position under article 35 of UCP 600 is no different to that which would prevail under UCP 500. If an issuing bank has a problem with the rule then an easier and more beneficial solution is to request documents be sent in two lots. Banks need to consider, given the number of sets of documents that are sent each day, how many are actually lost in transit. 6. Greedy condition: A safe keeping fee of USD100.00 per month will be levied if any of the following events occur: (i) either if we have effected payment after the 7th business day after we have sent our notice of refusal to the presenter. However if the beneficiary does not wish to incur such charges, then they should contact the applicant (ii) or if we have been asked by the presenter to return the documents no later than the 8th business day after we have sent our notice of refusal to the presenter. Comment: This and similar conditions were also seen under UCP 500, although it must be said that the clause is confusing as to how the fee will be applied. Neither the ICC nor the rules can contemplate such conditions in a credit nor insist that banks desist from taking such charges. Unfortunately, it is for the beneficiary to request their applicant to seek removal of the clause. 7. (Unnecessary) Disclaimer or warning that becomes popular: I Group, including all its branches and subsidiaries globally ("I Group"), undertakes no obligation to make any payment under, or otherwise to implement, this letter of credit (included but not limited to processing documents or advising the letter of credit), if at the time of opening, payment or implementation one of the three following events appears to occur: i. a breach of EU, UN or local sanctions or export control regulations applicable to the relevant office, branch or subsidiary of the I Group; ii. involvement, in any capacity, of individuals/organisations who are listed on or covered by any official US, EU, UN or local sanctions or export control list or who are resident of or located in Cuba, Iran, North Korea, Myanmar, Sudan or Syria or who are incorporated under the laws of any of these six countries; iii. a document presented evidencing one (or more) of the following facts: a) shipment on or transhipment through any means of transport and/or (air)port of or located or registered in any of these six countries; b) involvement, in any capacity, of individuals/organisations who are listed on any official US, EU, UN or local sanctions or export control list or who are resident, located in or incorporated under the laws of or owned by the Government of any of these six countries; c) goods/services which have their origin in any of these six countries; d) place of dispatch, place of receipt located in any of these six countries. Comment: With the growing number of countries that impose sanctions or other restrictions on certain countries, these kind of clauses will and do occur. There is no standard text for such wording and each bank through their internal and external lawyers will agree the language that is to be used. I must say that the opening statement for this example seems strange in that it refers to events at the time of opening. If the events are known at the time of opening you would think that the credit would not have been issued.