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Editor’s Note:
The Comparison is Jia Hao’s most valuable New
Year Gift to LC World.
The comparison between old UCP and new UCP is
relevant
as Jia Hao says it is
efficient
way to learn new things. What old to unlearn, what old to retain in your
mind, what new to put into your mind – all this is possible if you compare.
The comparison can help in new UCP implementation, in reorientating the LC
practice. The comparison is one step for implementation.
But the comparison needs time and expertise. This, however, is no problem.
Because Jia Hao does this job for you. Let us thank him for helping us with
the comparison to facilitate new UCP learning and implementation.
Comparison not for denigration of the old
But for facilitating leaning of the new
Comparison facilitates learning
Learning facilitates implementation
The
comparison is relevant, necessary
Helpful in
switching from UCP 500 to UCP 600
The best way
to learn what to
unlearn, what to relearn
Ravi Mehta,
Ph.D.
The
Jia Hao
Comparison
for
Implementation Facilitation
Comparison
is a simple, basic but efficient,
and a common sense way to learn new
things. There seems no exception
to the study of UCP600. From comparison we may see the difference. From the
difference we need know the underlying reasons. With those reasons, we will
have deeper understanding of UCP600. With such good understanding, we may
apply UCP600 correctly, certainly and efficiently so as to facilitate our trade settlement and banking
financing. Here, I would like to focus on some big points of differences
between UCP500 and UCP600 that deserve our high attention.
1.
The brand new definition :“honor”
– new but needless
UCP500 has
no definitions, while UCP600 has. However, some definitions like Advising
Bank, Applicant, Beneficiary, Issuing Bank and so on have the same meaning
as in UCP500. So, as a matter of fact, those definitions are not new -, they
just are lined up on the stage of UCP from behind. But the definition of
“honor” is brand new. It never appeared in UCP500. But what is the purpose
of establishing such a new definition. It seems not quite clear, at least to
me. In my understanding, the definition only introduces a new word “honor”,
and demonstrates what kinds of payment may be deemed as “honor”. It lists
three kinds: sight payment under sight payment credit; promise
against documents
together with payment at maturity under deferred payment credit; acceptance
(promise against bills of exchange) together with payment at maturity under
acceptance
credit. It seems payment under negotiation credit is not an honor, whether
by negotiating bank or issuing bank. However, according to the definition of
“negotiation”, negotiation need not be confined to negotiation credit. Any
purchase by the nominated bank may be deemed as negotiation. And any payment
by the issuing bank at sight or at maturity may not be considered as
negotiation. But what is called the issuing bank’s payment under negotiation
credit, as it is also not to be called as “honor”? Further, I wonder what is
the real purpose and meaning of such classification. To make the rules
concise? If so, I do not think it meaningful. To make the nomination from
the issuing bank more explicit, e.g., the nomination of the issuing bank
under deferred payment credit and acceptance credit is a combination of two
acts: both promise and payment at maturity? It seems not, because according
to UCP600 Art.12 (b) such nomination also includes prepayment before
maturity. So there is really a question, why do we need “honor” in UCP?
2.
Negotiation may be constituted in the credits other than the negotiation
credit?
UCP500 stipulates only the
bank that is authorized by the issuing bank to negotiate may negotiate. That
means that negotiation may only be constituted under a negotiation credit
that is a credit available with negotiation. However, the definition of
“negotiation” in UCP600 is “the
purchase by the nominated bank of drafts (drawn on a bank other than the
nominated bank) and/or documents under a complying presentation, by
advancing or agreeing to advance funds to the beneficiary on or before the
banking day on which reimbursement is due to the nominated bank.”
There is no restriction whether the credit is a negotiation credit or not.
When reviewing the process of the revision, we may find that in the draft
3‘s art.1-19, the definition of negotiation includes a qualifier that the
credit should be available by negotiation. However, in the later revision
drafts, such qualifier was deleted. According to the current definition, the
prepayment of a nominated bank may be deemed as negotiation. And according
to the definition of nominated bank, a bank with which the credit is
available is a nominated bank. It follows that an issuing bank may be a
nominated bank when a credit stipulates that it is available with the
issuing bank by acceptance. If such issuing bank prepays, it negotiates.
However, in UCP600 we always find that an issuing bank honors. Additionally,
according to art.12 (b) of UCP600, under an acceptance or deferred payment
credit there is a nomination from the issuing bank to allow the nominated
bank to prepay or purchase their promised undertaking. It signifies an
acceptance or deferred payment credit may be also a negotiation credit. If
so, why not UCP600
simply states that
“prepayment or purchase by the nominated bank is allowed under the credit”,
because then negotiation credit will be not needed any more.
3.
A separate
undertaking of issuing/confirming bank to reimburse nominated bank
UCP600 explicitly stipulates
that the issuing/confirming bank has a separate undertaking to the nominated
bank other than that to the beneficiary. So it may be understood that when a
credit stipulates a nominated bank it contains two undertakings: one is to
the beneficiary, the other to the nominated bank. The two are independent
from each other.
4.
Advising
bank has an obligation to accurately advise the terms and conditions of the
credit received
The
beneficiary will applaud for such revision,
which brings more reasonableness and more fairness into UCP600, and is also
the result of standard letter of credit practice. And it is consistent with
sub-rule 2.05(a) (ii) of ISP98 and 5-107(c) of UCC revised.
5.
The
nominated bank is allowed to prepay or purchase its promised undertaking.
UCP600 adds
a stipulation that “a nomination by an issuing bank for a nominated bank
to accept a draft or incur a deferred payment undertaking includes an
authorization for the nominated bank to prepay or purchase a draft accepted
or a deferred payment undertaking incurred by the nominated bank.” Such wording added may remove the impediment
brought by those cases (e.g. the Santander Case and
Emirates Bank Int'l PJSC v. Credit Lyonnais (Suisse) S.A.) to discounting
before maturity.
With this revision the controversial issue regarding the nominated bank’s
prepayment under acceptance or deferred payment credit may be settled well
under UCP600. The job is done well, in my view, and definitely welcomed by
bankers and traders and judges, because it is reflecting sound commercial
sense and the current prevailing banking and trade practice in the practical
commercial world.
6.
Different addresses of beneficiary and applicant are allowed unless they are
part of consignee information in bills of lading
The claim
for different addresses of the beneficiary and the applicant has been always
the banks’ refusal reason, although it does not matter with the underlying
transaction and the identification of the beneficiary and the applicant. ICC
discourages such “minimal” discrepancy as refusal reason, as it should be
taken on board by banks that letter of credit should be applied as a payment
tool. This revision will kill some banks’
malpractice of focusing on the minor difference of the address of the
beneficiary or the applicant among documents. But there are two exceptions mentioned in
UCP600: one is indication of a different country from that of credit, the
other is indication of different addresses in consignee or notify party
field in bills of lading. Another point that merits attention is if the
credit specifically requires indication in a document of the beneficiary or
applicant’s address stipulated in the credit, the address shown in that
document should be the same as on the credit.
7.
The requirement for “reasonable time” is replaced with a fixed period of
five banking days
Under
UCP500 when the credit lacks agreement both in express terms and implied
terms for determination of the time of refusal, the “reasonableness test” is
inevitable and requires a flexible interpretation and application in
individual cases, which cause complexity and uncertainty in banking
practice. In light of this crux, UCP600 is specifically designed to avoid
“reasonableness test” by removing the wording “reasonable time” and instead
stipulating a fixed period of time as 5 banking days for bankers’
examination and refusal of documents.
However, in a DCI interview, Ole Malmqvist, member of drafting group for
UCP600, addressed his concerns that replacing “reasonable time” with the
fixed period of time “five banking days” will make banks use five banking
days in all cases,
which will mean that the time in fact is not reduced from seven to five
banking days but increased from “a reasonable time” to five banking days.
N.D. George in his article also recognizes this problem and optimistically
considers that such banks will soon be identified and not be chosen by the
beneficiary for L/C business. However in any event, in my view, it may
probably be the disadvantage, but a minor
when
with the advantages brought by this new stipulation.
8.
Refusal notice
Two points
should be paid attention to:
1)
UCP600 clearly stipulates that refusal notice
must state that the bank is refusing to negotiate or honor, whilst
UCP500 implies such requirement.
2)
UCP600
allows refusal notice to state that “
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”, whilst under UCP500 it is not allowed
because
from perspective of law such conditional statement cannot bind the
beneficiary because it is only a unilateral modification of UCP Article d(ii)
imposed only by the issuing bank but unaccepted by the beneficiary. Now
UCP600 proposes such conditional statement to the beneficiary, and
consequently makes it not unilateral.
However, the beneficiary should bear in mind that, given that the documents
belong to the beneficiary as long as he has not been paid for them,
whether the disposal clause discussed above is incorporated into the credit
or stated in UCP, it may introduce a possibility of depriving the
beneficiary of his alternative of selling goods to a third party, as it is
not uncommon
that upon receipt of refusal notice the beneficiary may choose a new buyer
considering high demurrage, a rising market for the goods or the nature of
the goods (e.g. perishables). So, allowing and accepting the new stipulation
discussed above in UCP, the beneficiary or presenter will automatically
waive his right of disposal of the refused documents so long as the issuing
bank waives the discrepancies and honors the said documents. It follows
that, in this connection, the incorporation of the clause into UCP or the
credit seems unfair and disadvantageous to the presenter or the beneficiary.
Therefore, the beneficiary or presenter should fully cognize the effect and
result of the incorporation of such clause to protect him properly.
9.
The multimodal transport is given more importance
It seems that ICC has realized the increasing popularity of multimodal
transport in the international trade nowadays. So it changed the position
and order of the transport stipulations by moving the stipulations for
multimodal transport to first place in UCP600. So in my opinions, it is
advisable that bankers should acquire more knowledge of the multimodal
transport so as to bring more certainty into the process of examining
multimodal transport document and deeper understanding of relative UCP
stipulations.
10.On board notation in case of place of receipt different from port of
loading
According
to UCP600, if the field “port of loading” in the bills of lading presented
indicated clearly the port of loading stipulated in the credit, even if the
place of receipt indicates a place other than that port, the on board
notation need not include the port of
loading stipulated in the credit and the name of the vessel on which the
goods have been loaded.
11.
Master’s name need not be indicated
When an
agent for the master signs the bills of lading, the master’s name need not
be indicated. It just follows the current transport practice which was well
explained by T.O.Lee, a world- famous LC expert, as follows: “Unsurprisingly,
at the time the bills of lading are signed by a local agent of the master
the name of the master is often not known. That is one reason why I believe
that in the case of a bill of lading signed by an agent of the master it is
not necessary to give the name of the master. This change would enable the
harmonization
of trade practice for small- and medium-sized carriers, particularly in the
Far East. In that connection, I believe ISBP paragraphs 76(c), 103(b) and
123(c) have to be revised for the same reason. Legally speaking, the agent
is signing in the capacity of the master, and
not for a specific person.
Therefore, in my view, giving the capacity of the "principal" as a master is
sufficient, and there is no need to give the name of the person.
The agent receives his authorization from the carrier's head office as part
of the standard terms and conditions, not directly from the master himself.
At times the agent and master may not even have the opportunity to meet; the
one who looks after the crew may not be the one who signs the bills of
lading.”(for more details, please log on
www.tolee.com)
12.The issuing date and the actual flight date of AWB
UCP600 states that AWB must indicate issuing date.
When there
is a special notation regarding the dispatch date/flight date, such a date
in the notation will be deemed as shipment date regardless of whether the
credit requires the AWB presented show such dispatch date/flight date. The
former requirement is new. But UCP600 states no such requirement for other
transport documents, especially for bills of lading. The latter one
overrules UCP500 art 27(a) (iii) and ICC previous opinions (R135 and R170).
13.
Insurance
documents may be signed by the proxy of the insurer or underwriter.
It is the result of ICC Official
Opinion Document TA550 following the insurance practice.
14. An insurance
document may contain reference to any exclusion clause.
In the
previous revision draft, such stipulation was stated differently as follows:
“An
insurance document may contain reference to an exclusion clause such as
Institute Classification Clause, Cargo ISM Endorsement Clause, Institute
Radioactive Contamination, Chemical, Biological, Biochemical and
Electromagnetic Weapons Exclusion Clause, Institute Cyber Attack Exclusion
Clause and Termination of Transit Clause (Terrorism) and the like.
”
Such stipulation listing
specific exclusion clauses was the result of ICC Official Opinions Document
TA576, TA577 and TA589. However, the problem is because such listing is not
exhausting, it will easily bring possibility and uncertainty for banks to
judge which exclusions may be accepted and which exclusions may not. It
follows that some banks may refuse the insurance documents bearing an
exclusion clause which is not listed in above mentioned stipulation. If so,
such practice may be against insurance practice as it is usual practice
acceptable for the insurer to insert exclusion clauses. Therefore, UCP600 is
in keeping with the insurance practice.
KIM
REACTS
I was really looking forward to
reading your UCP 500/600 comparison - but I must admit that I was a but
disappointed about the content.
It may be that my expectations were
wrong, but I would expect that when making such comparison the purpose
should be to clarify things - e.g. for non-LC-experts.
In "Point 1" you discuss the new
concept "Honor". I do not see any clarification whatsoever - you even end up
asking why we need "Honor" in the UCP. As I see it
the fact is the Honor is here - it is in the UCP600, so any purpose should
be to clarify what Honor is. The way I see It the UCP 600 needed Honor
desperately! The UCP 500 was so difficult to read (impossible
if you did not know in advance). One reason was that
you would need to include "available by payment, deferred payment and
acceptance" in so many articles. In the UCP 600 you can just say "Honor".
So together with a number of other linguistic improvements -
the UCP 600 is much easier to read and understand for budding
LC-experts and users.
JIA RESPONDS
Thanks for your sincere expression
of your disappointment for my comparison and relative
comments on it. And I also agree with you that comparison is usually for the
purpose of clarification. But sometimes, you know, comparison may indicate
some problem/flaw/defect appeared in the new one. To me, it would be better
that we understand UCP600 well and also know what are still needed to be
revised again later
I do not think the linguistic
improvements as you mentioned and observed by me may be worthwhile as the
only reason for the birth of the definition when more confusion and
misunderstanding will be caused. We need concision, but more important, we
need clearness.
FURTHER KIM REACTIONS IN WHITE AND JIA RESPONSES
IN YELLOW
In "Point 2" I see similar problems.
Negotiation is defined as it is - the UCP 600 is closed to
amendments. To me it makes only little sense of talking about "UCP
600 draft 3 art 1-19" - what the reader needs is to try and understand what
negotiation means. Reading your comparison I see no clarification.
Yes, I only focused on the problem.
It’s really my problem. I did not explain what is negotiation and attach
importance to the nature of being before the issuing bank pays.
I am not sure that I understand the
purpose of your "Point 3".
I just intended to emphasize that
credit does not contain only an undertaking to the beneficiary, it also
contain one to the nominated bank, when there is a nominated bank in it. It
is better for UCP600 than UCP500 to clearly stipulate it.
As for "point 7" I think that you
should focus on that there now is afixed period of 5 days to refuse
documents. This has as such nothing to do with when payment should be made.
Therefore it has not (should be removed?) been made clear in article 15 that
the issuing/confirming bank must pay when they determine that documents
comply! So in fact these articles are much more clear than what you would
find in UCP 500.(As for Ole Malmqvist's argument I see quite many banks that
only pay after 7 days even now ... and when calculating interest for late
payment they will automatically start the calculation after 7 days).
What I wanted to say is under UCP500
banks may not be justified to pay after using up full seven banking days,
considering the requirement for reasonable time; whilst under UCP600 banks
may be justified to pay after using up full five banking days.
As for your "point 8". I think that
it would be fair to add that when a bank chooses option "b" (refuses but
will pay after waiver from applicant) - the presenter has the option to
revert with further instructions.
Yes, of course, that is what is
option “b” saying. But one point merits attention is that such further
instructions should be received before the issuing bank accepts the waiver
from the applicant.
All for now. I appreciate your
effort to discuss the UCP 600, but my friendly advise to you would be to
accept the UCP 600 as it is now (as it will not be changed) - and then work
from that perspective; 1) to obtain a deeper understanding of it yourself,
and 2) to help clarifying as may issues as possible before the rules are in
force.
Many thanks for your kind words. I
will bear them in mind.
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