As trade between nations rapidly increased in the early part of the 20th Century, a major barrier to expansion were conflicting laws governing letters of credit among countries. In 1933, members of the International Chamber of Commerce (ICC) created the first Uniform Customs and Practice for Documentary Credits (UCP), a set of rules that brought uniformity to letters of credit.

Since its inception, the UCP has become the most successful private set of rules for trade ever developed. Now firmly established, the UCP continues to remain an essential component in international trade. It establishes the conditions under which the majority of banks operate in documentary commercial credit transactions in more than 160 countries.

To remain current with trade and banking changes over the years, there have been five revisions of UCP conventions. The last, UCP 500, was completed in 1993. In May 2003, the International Chamber of Commerce authorized the ICC Commission on Banking Technique and Practice to begin a revision of UCP 500. The new UCP 600 becomes effective July 1, 2007.

As with other revisions, the general objective of the UCP 600 is to address important and relevant developments in the banking, transport and insurance industries. Additionally, the language and style in UCP 500 were reviewed in order to remove wording that may lead to inconsistent application and interpretation. When work on the revision began, global surveys indicated that, because of discrepancies, approximately 70 percent of documents under letters of credit were being rejected on first presentation.

Negative Effects

According to Gary Collyer, corporate director of ABN AMRO Bank N.V., and technical advisor to the ICC Commission on Banking Technique and Practice, “This obviously had, and continues to have, a negative effect on the letter of credit being seen as a means of payment; and if unchecked, it could have serious implications for maintaining or increasing its market share as a recognized means of settlement in international trade.”

Resolving contentious issues and keeping up with market developments were key to updating UCP 500. According to Pradeep Taneja, a member of the ICC Banking Commission and UCP 600 Consulting Group, there has been a decline in letters of credit over the past couple of years. One obvious reason: letters of credit have become more complex and expensive thanks to added charges, commissions and fees.

Banks in the early 1990s began charging discrepancy fees. Depending on the bank, the charges generally ranged from $50 to $125, or even higher per set of discrepant documents presented. And, most importantly, says Mr. Taneja, “There are alternative means and modes of trade financing that have emerged during the last few years, including factoring, forfaiting, invoice discounting and others.”

Compounding the problem was the thorny issue relating to the discounting of deferred payments that arose out of the Banco Santander vs Banque Paribas case tried in England. The court ruled that if a confirming bank discounted its own deferred payment undertaking, it did so at its own risk, and if fraud were established prior to the maturity date, the issuing bank was not obliged to reimburse the confirming bank. This ruling shocked many banks, and their actions to protect against fraud adversely affected the cash flows of many major exporters.

Three and Half Years

The process to revise the UCP began in May 2003. It included 15 drafts by a group of 10 world renowned professionals; a consulting group consisting of 41 global experts drawn from the banking, transport, insurance and legal sectors spanning 26 countries; a review of almost 600 Banking Commission opinions; relevant court cases; and more than 5,000 comments from more than 40 ICC national committees around the globe.

As a result of the tremendous amount of input, some UCP revisions were decided by votes from national committee members. For example:

  • On whether to retain or remove the term “on its face,” 67 percent voted to remove, 33 percent voted to retain. "On its face" will be used only in one place because of court precedents.
  • On whether to delete or retain the term “reasonable time,” 97 percent voted to delete, 3 percent voted to retain. The phrase was removed from the final text.
  • On removing the term “reasonable time,” the question was posed: How many days should the maximum period for acceptance or refusal of documents be? Forty-one percent voted for five days, 25 percent for six days, 28 percent voted for seven days, and 6 percent provided no comments. The five-day period was used in the final text.
  • On deferred payment credits, the question of whether to allow for discounting was raised. Seventy-three percent voted to allow, while 27 percent voted not to allow. Three sub-articles on discounting were included in the final text (in Articles 7, 8 and 12).

UCP 600 was formally approved by ICC members in October 2006 and will become effective July 1, 2007. "Language that was difficult to understand in the UCP 500 has been replaced with simple, precise and concise language in UCP 600," says Richard M. “Chip” Thomas, a noted training expert on letters of credit. Other UCP 600 updates include the elimination of phrases such as “reasonable care,” “reasonable time” and “on its face” (except in one article) from the rules. This is anticipated to reduce costly court cases involving ambiguous terms.

UCP 600 Highlights

The following are among the highlights that clarify, simplify and speed the payment process in UCP 600.

  • The number of Articles was reduced from 39 to 29.
  • Repetitive, redundant and ambiguous language was eliminated.
  • A new Article on “Definition of Terms” and “Interpretations” was added for clarity.
  • The document examination period was reduced from 7 to 5 days.
  • Numerous discrepancy issues were eliminated.
  • A new provision on applicant/beneficiary addresses was added.
  • Transport document shipment dates and their impact on presentation time were clarified.
  • Easier-to-understand transportation articles were created.

Major Changes in UCP 600

Significant changes, additions and substitutions made in UCP 600 are summarized below.

Article 2 "Definitions" creates a section of all key letter of credit terminology. It introduces the term “honour” and clarifies the terms “Negotiation” and “Nominated Bank.” Article 2 also defines the following terms: Advising Bank, Applicant, Banking Day, Beneficiary, Complying Presentation, Confirmation, Confirming Bank, Credit, Honour, Issuing Bank, Negotiation, Nominated Bank, Presentation and Presenter.

Article 3 "Interpretations" creates a section designed to clarify or eliminate the use of specific terms used in the UCP 500, and eliminates the term “revocable." This section combines many concepts that were dispersed in various sections of the UCP 500 in order to simplify and eliminate redundancy.

Article 6 "Availability, Expiry Date and Place for Presentation" clarifies the meaning of these terms and explains how they must be used in a letter of credit. This section also states that if a draft exists, it must not be drawn on the applicant.

Article 7 "Issuing Bank Undertaking" defines the responsibilities of the Issuing Bank. It emphasizes that the issuing bank must “honour” all payments in a letter of credit if the stipulated documents are in compliance with its terms.

Article 8 "Confirming Bank Undertaking" means the responsibility to reimburse another nominated bank that has honored or negotiated a complying presentation and forwarded documents to the confirming bank. Reimbursement for the amount of a complying presentation under a credit available by acceptance or deferred payment is due at maturity, whether or not another nominated bank prepaid or purchased before maturity. A confirming bank’s undertaking to reimburse another nominated bank is independent of the issuing bank’s undertaking to the beneficiary.

Article 9 "Advising of Credits and Amendments" brings together concepts that are scattered throughout the UCP 500. It also adds that banks “must accurately advise the letter of credit.” This article emphasizes that if a credit is advised through a particular bank, all amendments must be advised through that same bank.

Article 10 "Amendments" simplifies and clarifies the amendment process. Importantly, the terms and conditions of the original credit (or a credit incorporating previously accepted amendments) will remain in force for the beneficiary until the beneficiary communicates its acceptance of the amendment to the bank that advised such amendment.

The beneficiary should give notification of acceptance or rejection of an amendment. If the beneficiary fails to give such notification, a presentation that complies with the credit and to any not yet accepted amendment will be deemed to be notification of acceptance by the beneficiary of such amendment. As of that moment, the credit will be amended. A provision in an amendment to the effect that the amendment shall enter into force unless rejected by the beneficiary within a certain time shall be disregarded.

Article 12 "Nomination" clarifies the relationship between the beneficiary, confirming, nominating and issuing bank regarding the “honour” or “negotiation” of payments under a credit. It is important for beneficiaries communicating with the advising, negotiating or confirming banks to understand the precise actions of these banks in the payment process. Importers must accept the nominated bank’s actions while exporters must note that the nominated bank can take actions on its behalf.

Article 14 "Standard for Examination of Documentation" has replaced article 13 under the UCP 500. In addition, it has been expanded and covers concepts found in various UCP 500 articles. The following are key discussion points: 1) the 21 day presentation period, 2) the description of goods, services or the performance between the commercial invoice and all other documents and 3) the treatment of non-required documents when presented.

Additionally, it states that 4) a document may be dated prior to the issuance of a credit but not later than its presentation, 5) data in documents does not have to exactly match the wording in the credit or other documents as long as it does not conflict with the other data and 6) the addresses of the beneficiary and applicant on documents can differ from those stated in the credit as long as those addresses are in the same country as those stipulated in the credit.

Article 16 "Discrepant Documents, Waiver and Notice" relates to the responsibilities of the nominated, confirming and issuing banks with regard to the treatment of non-complying documents. These banks must give a single notice to the presenter of the documents detailing specifically the actions they are taking. This notice must be given within five days after the presentation of documents.

Specifically, Article 16 provides that when a nominated bank acting on its nomination, a confirming bank, if any, or the issuing bank decides to refuse to honor or negotiate, it must give a single notice to that effect to the presenter.

The notice must state that the bank is refusing to honor or negotiate, state each discrepancy in respect of which the bank refuses to honor or negotiate, and explain that the bank is holding the documents pending further instructions from the presenter, or the issuing bank is holding the documents until it receives a waiver from the applicant and agrees to accept it, or receives further instructions from the presenter prior to agreeing to accept a waiver (new option) or that the bank is returning the documents, or that the bank is acting in accordance with instructions previously received from the presenter (new option).

Article 17 “Original Documents and Copies” consolidates all the issues regarding the differences between original documents and copies. It clarifies the requirement that in every credit “at least one original of each document stipulated in the credit must be presented.” In addition, “if a credit requires presentation of copies of documents, presentation of either originals or copies is permitted.”

Article 18 "Commercial Invoice" is reflective of article 37 in the UCP 500. A key new feature states it is now permissible to submit an invoice for a higher amount of credit, and this greater amount will not be considered a discrepancy.

Articles 19 through 25 include new transport Articles and are anticipated to reduce discrepancies related to shipping documents. Consequently, they 1) clarify the appropriate signature on the transport document especially for agents, 2) explain shipment date to mean “the date of issuance of the transport document” unless there is a stamp or notation on the transport document indicating a different date, otherwise that date applies and 3) clarify that a transport document “indicating that transshipment may or will take place is acceptable, even if the credit prohibits transshipment.”

Article 27 "Clean Transport Document" emphasizes that the word “clean” need not appear on a transport document even if a credit has a requirement for that transport document to be “clean on board.”

Article 28 "Insurance Document and Coverage" incorporates UCP 500 articles 34, 35 and 36. It adds several important elements and indicates that cover notes will not be accepted, that an insurance document must indicate that risks are covered at least between the place of taking in charge or shipment and the place of discharge or final destination as stated in the credit. An insurance document may contain reference to any exclusion clause.

Article 31 "Partial Drawings or Shipments" is an important concept carried over from the UCP 500 that is expected to be well received by exporters. It states that, “A presentation consisting of more than one set of transport documents evidencing shipment commencing on the same means of conveyance and for the same journey, provided they indicate the same destination, will not be regarded as covering a partial shipment, even if they indicate different dates of shipment or different ports of loading, places of taking in charge or dispatch.”

Article 35 "Disclaimer on Transmission and Translation" indicates that if a nominated bank determines that a presentation is complying and forwards the documents to the issuing bank or confirming bank, whether or not the nominated bank has honored or negotiated, an issuing bank or confirming bank must honor or negotiate, or reimburse that nominated bank, even when the documents have been lost in transit between the nominated bank and the issuing bank or confirming bank, or between the confirming bank and the issuing bank.

Article 36 "Force Majeure" states that a bank assumes no liability or responsibility for the consequences arising out of the interruption of its business by acts or God, riots, civil commotions, insurrections, wars, acts of terrorism or by any strikes or lockouts, or any other causes beyond its control. Note that an exclusion for “acts of terrorism” has been added. A bank will not, upon resumption of its business, honor or negotiate under a credit that expired during such interruption of its business.

Article 37 "Disclaimer for Acts of an Instructed Party" states that a credit or an amendment should never state that the “advising to a beneficiary is conditional upon the receipt by the advising bank or second advising bank of its charges.”

UCP 500 Articles that were not incorporated into UCP 600 text include Articles 5, 6, 8, 12 and 38. The content of Articles 2, 6, 9, 10, 20, 21,22, 30, 31, 33, 35, 36, 46 and 47 were merged or incorporated differently within the text of the new UCP 600.

Weighing the Costs and Benefits

For some, the implementation of UCP 600 could be difficult and create uncertainty. However, once understood and implemented, the “UCP 600 will restore the respect, credibility and rightful place of letters of credit in international commerce," contends the consulting group’s Mr. Taneja.

Importantly, the new UCP 600 is likely to increase the use of letters of credit and, in turn, better facilitate international trade as new global markets and suppliers emerge.

This article appeared in January 2007. (KB)
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John Manzella
About The Author John Manzella [Full Bio]
John Manzella is a world-recognized author and speaker on global business, emerging risks, and the latest economic trends. He's also founder of both the ManzellaReport.com and Manzella Trade Communications, Inc. His latest book is Global America: Understanding Global and Economic Trends and How To Ensure Competitiveness.




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Talkback (2)

  • Guest (Oluseyi)

    Permalink

    I would like to know if UCP500 can still validly apply to letters of credit? If the LC specifies that UCP 500 is applicable,is this valid?

  • Guest (John Manzella)

    In reply to: Oluseyi Permalink

    Oluseyi: Thank you for your comment. It has been quite some time since I focused on the UCP and have not kept up with rulings.

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