1 interpretation and application of ucp 600 – part 1 xxv latin american foreign trade congress -...

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Interpretation and Application of

UCP 600 – Part 1

XXV Latin American Foreign Trade Congress - CLACE

Guatemala

June 3-5, 2009

Gary Collyer

Collyer Consulting LLP

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Applying UCP 600 and ISBP

Understanding the main rules of

UCP 600 and a review of the

important and critical opinions given

under UCP 600

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UCP 600 article 1 - Application of UCP

Concept of “Modify or Exclude”; No reference to “unless otherwise stipulated in the credit” throughout

UCP 600; UCP applicable when the LC expressly indicates that it is subject to

these “rules”; and Retention of Standby Letters of Credit.

There is a need to understand the concept of modification and

exclusion and when it is appropriate or not.

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UCP 600 article 2 - Definitions

Negotiation:

the purchase by the nominated bank of drafts (drawn on a bank other than the nominated bank) and/or documents under a complyingpresentation, by advancing or agreeing to advance funds to thebeneficiary on or before the banking day on which reimbursement is due to the nominated bank.

Q. What is agreeing to advance?Q. Why no reference to recourse?Q. Why “on or before the banking day reimbursement is due ….”?

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Applying UCP 600 and ISBPUnderstanding recourse

Having confirmed a LC, the confirming bank has no right of recourse to the beneficiary in the event of default by the issuing bank, or the issuing bank subsequently identifying discrepancies that were not determined by the confirming bank.

But what form of recourse is available where the documentary credit is not confirmed? Recourse when the issuing bank fails to provide reimbursement according to

the terms of the credit citing bankruptcy, lack of foreign exchange, Government intervention etc.

and (?)

When the issuing bank identifies discrepancies in documents that the nominated bank failed to determine.

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Applying UCP 600 and ISBPUnderstanding recourse – LC available by “Honour” with a nominated bank

(not confirmed)

Honour is to: Pay, if the LC is available by sight payment;

Accept a draft drawn on the bank, if the LC is available by acceptance; or

Incur a deferred payment undertaking, if the LC is available by deferred payment.

To pay, accept or incur a deferred payment undertaking is a commitment on the part of the nominated bank and is considered without recourse to the Beneficiary. For payment LCs a separate recourse agreement may, however, be made with the beneficiary

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UCP 600 article 6 - Availability, Expiry Date and Place for Presentation

Sub-article 6 (a):

A credit must state the bank with which it is available or whether it

is available with any bank. A credit available with a nominated bank

is also available with the issuing bank.

Q. Why allow any form of LC to be available with any bank?

Q. Is it really possible under each type of availability for a LC to be available with any bank?

Q. What is the value to a beneficiary of a LC available with any bank?

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Applying UCP 600 and ISBPUnderstanding the correct form of availability

with an issuing bank;

with a confirming bank;

with a nominated bank;

with an issuing bank and confirming/nominated bank;

with issuing/confirming bank for expiry and nominated bank for honour or negotiation;

for presentation only.

Banks need to understand ‘availability’ and what it means in each transaction.

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Sub-article 7 (c) – ICC Opinion TA. 674 approved March 2009

The conclusion to this opinion (as to the effect of extending a maturity date

of a draft or deferred payment undertaking) includes:

“Whether a replacement draft or new deferred payment undertaking is

required will be determined by local law at the place of acceptance or where

the deferred payment undertaking is incurred.” if not required then

“the draft must be re-accepted to mature on the new agreed maturity date

(where the credit is available by acceptance with the confirming bank); or

a new or amended deferred payment undertaking must be incurred to reflect

the new agreed maturity date (where the credit is available by deferred

payment with the confirming bank).” continued

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Sub-article 7 (c) – ICC Opinion TA. 674 approved March 2009

The conclusion to this opinion (as to the effect of extending a maturity date

of a draft or deferred payment undertaking) concludes by saying:

“By complying with the above, and in line with the definition of honour in

article 2, i.e.,

“b. to incur a deferred payment undertaking and pay at maturity if the credit

is available by deferred payment”; and

“c. to accept a bill of exchange (“draft”) drawn by the beneficiary and pay at

maturity if the credit is available by acceptance,

the obligation of the issuing bank to reimburse the nominated (confirming)

bank, according to sub-article 7 (c), extends to the new agreed maturity

date.”

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Applying UCP 600 and ISBPUnderstanding the risks when acting in a non-nominated capacity

It is often the case that a bank will act for its client under a transaction where they are not stated to be the nominated bank or the LC is not designated as being ‘available with any bank’.

The issuing bank must still honour a complying presentation made by that ‘non-nominated’ bank, but the issuing bank may seek confirmation from a named nominated bank (of no prior payment) before honouring;

The non-nominated bank has no greater protection from UCP 600 as does the beneficiary in the delivery of documents to the issuing bank – article 35 would not apply.

The examination of documents by the non-nominated bank carries no value within the context of UCP 600 and any settlement thereunder is outside the scope of UCP 600.

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Applying UCP 600 and ISBPAdding confirmation – what is possible and what needs to be observed

considerations to add confirmation;

reduced expiry;

reduced amount;

determining confirmation of 100% where a split schedule is included in the LC;

more than one confirming bank.

The basic rule for a bank requested to confirm is “do I understand what I am confirming and the risks that I am undertaking”

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Applying UCP 600 and ISBPUCP 600 article 9 - Advising of Credits and Amendments

Concept of 2nd Advising Bank; Bank now “satisfies itself” as to the apparent authenticity; and Advice of LC or amendment “accurately reflects” the terms and

conditions of the LC or amendment received.

Are instructions to confirm addressed to the advising bank and/or the

second advising bank that is stated in the LC?

What is ‘satisfying itself’ as to the apparent authenticity?

What are the risks of not passing to the beneficiary what was received?

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Applying UCP 600 and ISBPUCP 600 article 10 – Amendments

Sub-article 10 (c):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.

Q. Effect of banks requesting a beneficiary certificate certifying as to which amendments have been accepted or rejected.

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Applying UCP 600 and ISBPUCP 600 article 10 - Amendments

Let us review the circumstances of a LC:

LC issued for USD25,000 covering shipment of nuts and bolts.

Partial shipment allowed.

Amendment received reducing amount to USD15,000

Beneficiary subsequently presents documents for USD15,000 and the LC is

valid for another 5 weeks.

Has the amendment been accepted or has a partial shipment been effected?

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Applying UCP 600 and ISBPNomination and acting under a nomination

Consider the UCP 600 position in article 12:

Nominated bank may obligate itself under an unconfirmed credit if expressly communicated to beneficiary.

Receipt or examination and forwarding of documents does not constitute honour or negotiation.

Q. what is nomination?

Q. what is “a nominated bank acting on its nomination”?

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Applying UCP 600 and ISBPWhat constitutes an ‘express communication to the beneficiary’?

Silent Confirmation agreement

Agreement or Commitment to Negotiate/Purchase/Honour etc.

An indication, in any ‘written’ communication to the beneficiary, that the bank “will” honour or negotiate - as opposed to a statement on a covering advice to the LC that states something like “This credit is available with us by negotiation”.

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UCP 600 article 12 - Nomination

Sub-article 12 (b):By nominating a bank to accept a draft or incur a deferred payment

undertaking, an issuing bank authorizes that nominated bank to prepay or

purchase a draft accepted or a deferred payment undertaking incurred by

that nominated bank.

Note:

Only applicable where nominated bank accepts a draft or incurs a

deferred payment undertaking.

An authorization not an obligation to prepay or purchase.

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UCP 600 article 14 - Standard for Examination of Documents

Sub-article 14 (a):A nominated bank acting on its nomination, a confirming bank, if any,

and the issuing bank must examine a presentation to determine, on

the basis of the documents alone, whether or not the documents

appear on their face to constitute a complying presentation.

Q. What is the scope of “check on the basis of the documents alone”?

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Applying UCP 600 and ISBPUCP 600 article 14 - Standard for Examination of Documents

Sub-article 14 (b):A nominated bank acting on its nomination, a confirming bank, if any, and the issuing bank shall each have a maximum of five banking days following the day of presentation to determine if a presentation is complying. This period is not curtailed or otherwise affected by the occurrence on or after the date of presentation of any expiry date or last day for presentation.

Q. Removal of “reasonable time” but does not maximum give a ‘reasonable time’?

Q. Can a beneficiary hold a nominated bank responsible if the documents are presented 2 days prior to expiry but examined 2 days after expiry and discrepancies are found that the beneficiary is now unable to correct?

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Sub-article 14 (d):Data in a document, when read in context with the credit, the

document itself and international standard banking practice, need not

be identical to, but must not conflict with, data in that document, any

other stipulated document or the credit.

Note:

No reference to inconsistency.

Data need not be identical, but must not conflict.

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Sub-article 14 (d):

LC calls for shipment of 5000 MT Stainless Steel Coils

Invoice states 5000 MT Stainless Steel Coils

Certificate of Origin states Stainless Steel Coils

Bill of Lading states 5000 MT Coils

Data is not identical but is it conflicting?

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Sub-article 14 (d):

LC calls for shipment of 5000 MT Stainless Steel Coils

Invoice states 5000 MT Stainless Steel Coils

Certificate of Origin states Stainless Steel Coils

Bill of Lading states 5000 MT Aluminium Coils


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Sub-article 14 (d):

LC calls for shipment of 5000 MT Rice of Indian and Sri Lankan origin

Partial shipments allowed

First drawing:

Invoice states 3500 MT Rice Indian Origin

Certificate of Origin states Rice Indian Origin

Bill of Lading states 3500 MT Rice


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Sub-article 14 (f):If a credit requires presentation of a document other than a transport

document, insurance document or commercial invoice, without stipulating by

whom the document is to be issued or its data content, banks will accept the

document as presented if its content appears to fulfil the function of the

required document and otherwise complies with sub-article 14 (d).

Q. What are the requirements for a document to appear to fulfil its function?

Q. Are document checkers supposed to become experts in documentation?

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Sub-article 14 (f):How to determine a document fulfils the function of the required document?

LC requires presentation of Inspection Certificate and Certificate of Analysis

(no other details given).

Inspection Certificates states “We hereby certify that we have inspected

[STOP RIGHT HERE] …”

Analysis Certificate states “We have analysed the consignment [STOP

RIGHT HERE] …”

the documents fulfil the function by the opening statements. The remainder

of the document is subject to review according to sub-article 14 (d).

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UCP 600 article 14 – Standard for Examination of Documents

Sub-article 14 (h)If a credit contains a condition without stipulating the document to

indicate compliance with the condition, banks will deem such

condition as not stated and will disregard it.

Issues:

1. Understanding the impact on the applicant

2. Ability of the issuing bank to enhance the wording in the LC

3. Action required by the beneficiary

4. Examination of such terms by a nominated bank

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Sub-article 14 (h) – ICC Opinion TA. 644 approved April 2008

The conclusion to this opinion (as to the effects of a non-documentary

condition that is misstated in one or more documents) includes:

“According to sub-article 14 (h), banks will deem a non-documentary

condition as not stated, (on the basis that there is no necessity for

the beneficiary to provide any evidence of compliance) and will

disregard it. Should the beneficiary, nevertheless, elect to insert

such data on any other stipulated document then they must ensure

that it does not conflict with the data in the credit. The view of the

Banking Commission is that sub-article 14 (h) is not absolute and is

qualified by the content of sub-article 14 (d).”

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Sub-article 14 (h) – ICC Opinion TA. 644 approved April 2008

Simple examples to demonstrate the effect of the opinion given in TA.644:-

LC states in additional conditions:

Vessel must be less than 25 years old.

Goods must be packed in 25KG steel drums with red stripe

Bill of Lading includes within the body of the document “Vessel built in 1980”

Packing list states “Goods packed in heavy duty plastic drums with red

stripe”

In both instances, the documents would be discrepant.

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Sub-article 14 (j):When the addresses of the beneficiary and the applicant appear in any

stipulated document, they need not be the same as those stated in the credit

or in any other stipulated document, but must be within the same country as

the respective addresses mentioned in the credit. Contact details (telefax,

telephone, email and the like) stated as part of the beneficiary’s and the

applicant’s address will be disregarded. However, when the address and

contact details of the applicant appear as part of the consignee or

notify party details on a transport document subject to articles 19, 20, 21, 22,

23, 24 or 25, they must be as stated in the credit.

Q. Addresses must appear on every document, even if different?

Q. Is any address required at all?

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UCP 600 article 19 - ICC Opinion TA. 650 approved April 2008

The conclusion to this opinion (enquiring as to the need for an on

board notation on a MMTD type document) includes:

“A dated on board notation is clearly required when the credit so requests. It

is also required when the document evidences the first leg of the carriage as

a sea shipment from the place stated in the credit.

Where a transport document is pre-printed shipped on board then the date of

issuance would be deemed to be the date of shipment. When the document

evidences the first leg of the carriage as a sea shipment from the place

stated in the credit, there is a need for evidence of the date the goods were

shipped on board i.e., pre-printed or by notation.”

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UCP 600 - ICC Opinion TA. 675 approved March 2009 regarding release of cargo

clauses

This opinion draws a line between the data that is to be examined for

compliance and that data which is considered to be terms and

conditions of carriage.

For example, data referring to the on board nature of the bill of lading

is to be examined. However, data referring to the action of the carrier

in the release of the cargo is considered to be terms and conditions

of carriage.

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UCP 600 article 20 - ICC Opinions TA. 635 approved October 2007

and TA.665 & 667 approved October 2008

There is no wording in UCP 600 that is similar to that which

appeared in UCP 500 sub-article 23 (a) (ii), but ……….

The conclusions to the above opinions include:“Unless it is evident from the bill of lading that the shipped on board

statement applies to the vessel and the port of loading, the bill of lading will

require an on board notation showing the port of loading and the name of the

vessel, even if the goods are loaded on the vessel named in the bill of

lading.”

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UCP 600 articles 20 and 21 - Bill of Lading / Non-Negotiable Sea Waybill

For example:

LC requires shipment from Rotterdam to Puerto Quetzal

Bill of lading shows:

Pre-carriage [blank]

Place of receipt Amsterdam

Ocean vessel River Sun

Port of loading Rotterdam

Port of discharge Puerto Quetzal

BL marked “Shipped on board 25 May 2009” – Is this okay?

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For example:



Pre-carriage [blank]

Place of receipt Rotterdam CY

Ocean vessel River Sun

Port of loading Rotterdam



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Revised wording:

If the bill of lading [non-negotiable sea waybill] does not indicate the port of

loading stated in the credit as the port of loading, or if it contains the

indication “intended” or similar qualification in relation to the port of loading,

an on board notation indicating the port of loading as stated in the credit, the

date of shipment and the name of the vessel is required. This provision

applies even when loading on board or shipment on a named vessel is

indicated by pre-printed wording on the bill of lading [non-negotiable sea

waybill].

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For example:



Pre-carriage River Sun

Place of receipt Rotterdam

Ocean vessel River Moon

Port of loading Dubai



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UCP 600 article 22 - ICC Opinion TA. 662 approved October 2008

The conclusion to this opinion states that any indication of a charter

party will be considered as making the transport document a charter

party bill of lading for the purposes of UCP 600. This applies even if the

transport document otherwise complies with article 20.

For example, wordings such as: “Issued pursuant to charter party dated …… [no date]” “Freight paid as per charter party”

will be considered as evidence of an indication of a charter party

even if the charter party reference or date is not inserted.

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UCP 600 article 22 - ICC Opinion TA. 683 approved April 2009

Does a credit that requires the presentation of a charter party bill of lading

and the respective charter party contract modify the rule in sub-article 22 (b)

that says “A bank will not examine charter party contracts, even if they are

required to be presented by the terms of the credit”? Is a bank required to

examine, cursorily or otherwise, to establish that the contract relates to the

charter party bill of lading?

The conclusion to both these questions was NO. The objective of sub-article

22 (b) is to discourage the requirement for the contract to be presented in

the first place.

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Documentary Credits allowing different forms of transport/transport document

The conclusion to ICC opinion TA.641 refers to situations where the LC

allows for various forms of transport document i.e., in the case of the

opinion, consignment notes, bill of lading or forwarding agents receipt

evidencing shipment from Gdynia, Gdansk or Swinoujscie to Russia, and

states:

“It should be noted that the credit, in allowing for different forms of delivery,

should have provided for the individual requirements where consignment

notes, bills of lading or a goods receipt were to be presented.”

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UCP 600 article 31 - Partial Drawings or Shipments

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. (b) Clarification given that in the case of multiple presentations, on same

means of conveyance and same journey, latest date = date of shipment; and

(b) Clarification where more than one means of conveyance used within the same mode of transport (i.e., 2 trucks) and one or more sets of transport documents presented = partial shipment.

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UCP 600 article 35 – Disclaimer on Transmissionand Translation

If a nominated bank determines …….. an issuing bank or confirming bank must honour or negotiate, or reimburse ……., 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.

Q. Honour without documents?Q. Insist on replacement originals?Q. Insist on copies being provided?

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Documentary Credits stating that issuing bank charges are for account of the

beneficiary

The conclusion to ICC opinion TA.659 states, where a credit specifies that

the issuing bank’s charges (except issuance fees) are also for account of the

beneficiary:

“The credit stated that all banking charges except those related to the

opening were for the account of the beneficiary. If the issuing bank wishes to

make a deduction from the proceeds in respect of their fees, then the credit

should clearly indicate the amount or percentage of charges that will be

deducted. It will then be for the beneficiary to decide whether it will perform

under the credit with such a charge for its account.”

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Thank You

Contact : Gary Collyer, Collyer Consulting LLP

Email : [email protected]

1 interpretation and application of ucp 600 – part 1 xxv latin american foreign trade congress -...

Documents

issuing bank

issuingconfirming bank

confirmingnominated

nominated confirming

nominated bank of drafts

isbp ucp

credit available

nominated bank andor