[From LC VIEWS Vol. 3; No. 9; September 2006]

Their Concerns; Their Opinions

A great necessity with great objective,
but a flawed attempt with controversial results

T. O. Lee: UCP is not the culprit – it is the document dishonoring bank

UCP is not panacea

It is common that parties put the blame on UCP when they have disputes or different interpretations of the UCP articles.

I have time and again stressed in my published comments and articles that a lot of people have unrealistic demand or expectation upon the UCP. They assume that the UCP can resolve all their disputes. Hence they look to the UCP for the solutions to all their disputes and problems. This is utterly wrong.

The purpose of UCP is to codify international banking practices in a simple, easy to understand manner. Hence it is not to be written by the lawyers to make sure that its language is customer friendly. As a result, the UCP should have no more than 50 rules. Otherwise it would turn into a code of regulations as thick as a yellow page telephone directory.

Different trade situations may give rise to different rules. The UCP is intended to be used as a default rule. Hence, the UCP is to state the default rules, based on majority consensus in the voting of ICC National Committees. Those countries or parties that wish to act differently may modify or exclude the particular articles. This is clearly stipulated in article 1 in UCP 500 or UCP 600.

No rules are perfect Most of the arguments on discrepancies are frivolous in nature, simplify used as an excuse to buy time for the banks that have obligation to pay. The parties should blame the dishonoring banks than the UCP.

It is quite true that a contract is only as goods as the parties behind it. So does the UCP!

From my experience, when you have human beings, you always have disputes; unless we could remove even a slight trace of selfishness form our mind. This would only be achievable if we could cast away the "self" concept, as promoted by the teachings of Buddha. If we have no "self" then we need no rules.

From the law certificate courses, I was told that the ultimate goal is to abolish all codes of laws, because at that time we all turn into perfectly good guys. This may be mission impossible, from the present state of world environment.

Some optimistic experts think that when we have e-UCP, we should have much less disputes. I do not agree. As long as we still have selfishness in our mind, we will still have disputes, even more as time goes by, only from paper disputes to cyber disputes.

Jia Hao: UCP is imperfect but not essentially culprit and perfect UCP is the mission impossible

Weaknesses in UCP are impediment to trade development and may be considered culprit or  made scapegoat.

Frankly speaking, I feel somewhat uncomfortable with the words “culprit or scapegoat” to describe UCP, given that UCP has been long recognized to regulate LC operations by reflecting trade usages. Instead, I am really aware of the weaknesses of the non-systematic drafting technique used in the UCP revision, which unfortunately constitutes grounds of some refusals. Those weaknesses may be not realized and contemplated by the drafters of UCP500, or be overlooked as loopholes in the course of drafting. Here, some of them may be illuminated as follows:

1)     UCP500 Art. 20(b) regarding “originals”

In this provision, the words “also” and “marked” are not appropriate to use to explain the practice regarding originals, rendering the provision vulnerable to misinterpretation and misunderstanding. And the case: Glencore International AG v. Bank of China is just the aftermath of this weakness. Fortunately, having recognized the consequent problem and reaction of the international LC operations community, ICC correctly addressed its position paper to help ensure the proper interpretation in “originals issue”, and also incorporate their decisions in this paper into UCP Revision Draft. (For more detailed and comprehensive analysis regarding this issue, see Professor James E. Byrne: The Original Documents Controversy From Glencore to the ICC Decision, IIBLP, 1999)

2)    UCP500 Art. 9(b)(ii) regarding “undertaking under deferred payment credit”

There is one more court last year (Emirates Bank Int'l PJSC v. Credit Lyonnais (Suisse) S.A. 2005) that has added its voice to those cases (e.g. the Santander case), and also to the view (this court calls it a trend) that a confirmer that discounts its own obligation is not entitled to be reimbursed if fraud is discovered prior to maturity of the credit. In my view, although the reasoning addressed by those courts may be sound especially subject to literal interpretation of UCP500, you know, but the result is unsettling. It may bring negative effect to the trade financing development, and may follow to impede international business and trade. Why? Correct analysis leads to unsettling result? Give a further thought, you may see the reason just roots from the UCP500. That is the source from which those thoughtful analyses of the courts derived. So ICC banking commission now revised it accordingly, added 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.” This added wording may remove the impediment brought by the cases to discounting before maturity. Now it seems that this controversial issue 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.

3) UCP500 Art. 14(e) regarding “preclusion rule”.

As to the effect of Article 14(e) that is confined to the period between decision and notification, that is “without delay”, while not to the period for examination, some authorities such as distinguished Professor John F. Dolan in his book, The Law of Letters of Credit and Brooke Wunnicke and Pauls Turner in their book, Standby and Commercial Letters of credit, discovered and realized the loophole that Article 14(e) is inapplicable to the bank’s duty to examine the documents within a reasonable time if insisting on a strict literal interpretation. Fortunately, the UCP Revision Draft has corrected this drafting oversight.

4) UCP500 Art. 17 regarding “Force Majeure”

The wording of this provision may lead to a misunderstand that even the presentation has been made within the credit expiry, if the credit then expires during the interruption of business by Force Majeure, the bank will not honor, negotiate or reimburse upon resumption of its business. ICC R336 is the example. In the query, the issuing bank argued that it did not have to pay because the L/C had expired during the sanction period although it was timely drawn down. It obviously misunderstood the Force Majeure Rule, as the credit had been timely drawn down, that is, the presentation had been made within the credit expiry, so the Force Majeure Rule stipulated in UCP should not be applied. Unfortunately ICC’s reply seemed not to get to the point. Instead, it replied that “The wording of Article 19 UCP 400 (Article 17 UCP 500) has not changed materially through a number of publications of UCP. Given that the issue of sanctions is a relatively new concept, the previous drafters of UCP would not have had this in mind when drafting the Rules.” Therefore, according to literal interpretation, it is really opt to misunderstand that as long as the credit expiry date falls within the period of business interruption caused by Force Majeure, the Force Majeure Rule may be applied. However, whether the presentation is made timely or not, the credit will be still expired. In another word, the fact that the credit is expired cannot be affected by the presentation of documents. So the point is to see whether the presentation is made unsuccessfully or not during such interruption, instead of whether the credit expires or not during such interruption. It follows that if compliant documents are presented to the issuing bank before such interruption, but cannot be honored because of such interruption, it would seem that the bank is still bound by its undertaking after resumption of its business; even if the credit had meanwhile expired (ICC Publication No. 459 Case 61 may be referred to for support).

5) UCP500 Art. 23(a)(i) regarding “name of master”

The pertinent part of this provision requires that when the agent for the master signs bills of lading, the name of the master be indicated. However, in practice the agent who signs the bills of lading on behalf of the master usually does not know the exact name of the master. So, there is no need to give the name of the master. But rather, the capacity of the “principle” mentioned as a master is sufficient. This inconsistency with trade practice may definitely cause unnecessary discrepancies. Fortunately, the UCP Revision drafting group revised accordingly to remove such a requirement for catering to the trade practice.(For further details, see T.O.Lee: The UCP 500 Transport Articles need to be revised, DCI Vol. 9 No. 4, Oct - Dec 2003).

6) UCP provisions regarding “original waybills”

According to Article 30 §2 of CIM (consignment notes must include a duplicate for the consignor), the Uniform Rules Concerning the Contract for International Carriage of Goods by Rail, the consignor may modify the contract of carriage, for example, giving instructions for the goods to be stopped in transit, for the goods to be delivered to a person other than the consignee shown in the consignment note, and the like, by producing the duplicate of the consignment note. So, to keep the duplicate may exercise the right of disposal of the goods, and avoid modification of the contract of carriage by the consignor. Similarly, according to Article 12 of CMR(three original consignment notes signed by the consignor and the carrier: the first copy shall be handed to the sender, the second shall accompany the goods and the third shall be retained by the carrier.), the sender should produce the first copy of the consignment note to exercise the right of disposal. And according to Article 12 of Warsaw Convention (three air consignment notes issued and signed: the first part shall be marked "for the carrier," and shall be signed by the consignor. The second part shall be marked "for the consignee"; it shall be signed by the consignor and by the carrier and shall accompany the goods. The third part shall be signed by the carrier and handed by him to the consignor after the goods have been accepted.), the consignor must produce the third part to exercise the right of disposal of  the goods In light of the above, the UCP should stipulate the presentation of the essential original consignment note to control the right of disposal. However, sea waybill is an exception. The shipper of the sea waybill without holding original sea waybill may still exercise his power to redirect the goods to someone other than the person who was originally named as consignee. Under sub-rule 6(i) of the CMI Uniform Rules for Sea Waybills 1990, the shipper is the only person free and entitled to give instructions to change the name of the consignee provided that a) the change is not prohibited by the applicable law; b) that reasonable notice of the change in consignee is given to the carrier in writing; and c) that the change is made before the original consignee claims delivery of the cargo at destination. Therefore, it is reasonable and logical to removing the requirement for presentation of full set of sea waybills. And whether full set are needed for presentation may depend on the specific requirement in specific letter of credit basing on the rule of free contracting. But if bankers or consignees want to exercise the right of disposal of the goods, they may require the sea waybill to contain a clause of "NODISP" (A typical wording of such a clause is: “By acceptance of this Waybill, the shipper irrevocably renounces any right to vary the identity of the Consignee of the goods during transit.”), in this way, the shipper's right of altering delivery instructions is waived.

The list is not exhaustive. We have to confess there are really some weaknesses in UCP500 which nonetheless are inevitable, in my view, because being perfect is mission impossible. However, efforts are needed and should be encouraged for rendering UCP better. And that is why the UCP Revision is now on the way. On the other end, as UCP is the rules that are trying to reflect trade usages whether are descriptive or prescriptive, any incongruity between it and the current practice will cause impediment to trade development and be deemed as “culprit or scapegoat” for those problems that arise henceforth.

Abdulkader Bazara: The culprit is the trend and tendency of rule manipulation

The culprit is the user of rules

UCP is neither the culprit nor the scapegoat.  It is a set of practical rules available to be used by two parties that want to trade.  The parties are free to add or delete rules to it.  They can mold it the way they want. The culprit, in my opinion, like in any other rules whether they are driven by religious belief or law, is the users of the rules  The users may not be equipped with the know-how or are deliberately adding loose conditions or other ambiguities to the letter of credit subject to UCP to find a way out at the time of unfavorable business situations.  This is very clear from the number of discrepant documents under credits. From my, over 20 years, experience in trade finance, I have not seen a set of documents rejected by an applicant unless the business is not in his / her favor.  That is the reason behind few numbers of rejections in payments despite high numbers of discrepant presentations.

The number of discrepancies is high because nobody is reading the rules or even tries to read the credit itself.  The LC community has tried to elaborate the UCP further and have issued the ISBP 645.  What happened? Did the discrepancies substantially get reduced? I doubt it, because, for a fact, I know that most of the trading parties don’t even know whether the ISBP exists or not. 

The LC community is trying to improve the rules; UCP 600 is on the offing; new ISBP is a step ahead but the number of discrepancies may not in my opinion be reduced unless all parties, not only financial institutions, take a keen interest in the rules and try to apply them.  As we all know, in letters of credit business, in case there is conflict between the UCP and the terms and conditions of a letter of credit, the terms expressly stated in the credit will prevail. Therefore, there will always be a room for parties to a trade transaction to use the terms and conditions of a credit as scapegoat not to pay despite the dynamic revisions of the UCP

Kim Christensen: The culprit – bad LC and bad trade practices

The number one problem in dealing with LCs is the bad LC

Had I been asked to add a word to the UCP – I would never ever have thought of either “culprit” or “scapegoat”. Anyway – following that line of thinking, one can choose different angles, and the one that I will choose here is “statistics”

From a statistical point of view the UCP is clearly the scapegoat. No doubt you can find examples where wording in the UCP causes problems – but if I look at the cases that pass through my desk – then these are extremely rare. It may be that someone have misunderstood or misinterpreted something in the UCP – but for that you can not necessarily blame the UCP.

I think that the number one problem when dealing with LCs is that the LC is poorly worded. The blame may be on the buyer or the bank, but the result is an LC may not work – or does not provide the security that the seller expects. It may of course be based on lack of UCP knowledge – but it is hardly fair to blame the UCP for that.

Another big problem is wrong discrepancies; i.e. the bank refuses documents raising discrepancies out of line with the UCP. Again there may be many reasons for that. Some may want to stall payment, some may want to push for a reduced price, some may have found the goods cheaper somewhere else and want to cancel the order. In any case the basis for the problem is not the UCP – it is the commercial agreement or the relationship between the parties.

One may argue that the UCP is hard to understand and read – and that may in fact be true. However, it you choose the use the LC, then it is simply a waste of time and money if you do not “invest” in LC knowledge. If you do not want to learn about the UCP – you should not use the LC instrument. If on the other hand you invest the time needed to know and understand the UCP – then no doubt the “value” you get from the LC increases.

Ravi Mehta: UCP is not the culprit – it is the bad knowledge, bad tendencies, and bad intentions

 For all controversies and disputes in LC matters UCP is often blamed - UCP is not clear; UCP is not specific; UCP is silent; UCP is irrelevant; UCP is not as expected; UCP is unrealistic; UCP is unreasonable; UCP is self-contradictory; UCP is not consistent with the trade practices and so on. There are recurrent queries to the ICC for clarification on UCP and this shows that the faulty UCP is apparently the root cause of disputes and controversies. The ICC is virtually International Chamber of Clarifications. UCP’s rule of compliance, for example, is considered culprit for controversial rejection because the rule is not clear or not reasonable. The rule does not explain and exemplify international standard practice that it expects the document examiner to follow in document examination. The ICC publication No. 645, popularly known as ISBP, comes to the rescue of UCP to make its rule compliance clear, understandable and purposeful, leading to some relief in the form of reduction in rejections.   It is said that rule of compliance is practically not for compliance determination but virtually for rejection determination. But this does not mean the UCP is culprit. The real culprit is the bad intention and bad practice. The culprit is the misinterpretation and misapplication tendency. The culprit is the deficiency of UCP knowledge.  This rule is made a scapegoat where the rejection decision is not based on good intentions or good knowledge. It is said that particularly where documentation rejection is pre-determined the document examining bank tries to escape from the controversy or dispute making the rule of compliance  a scapegoat. He takes refuge in the rule of compliance for his bad intentions and actions, saying “ I rejected because there was discrepancy and I determined discrepancy in accordance with the compliance rule”. But is the so called discrepancy really discrepancy? Here are the uncertainties and confusion. When there are uncertainties and confusion in determination of discrepancies the UCP easily becomes scapegoat if and when there is an attempt and necessity to make it scapegoat. UCP is vulnerable to exploitation, to intended misapplication because of the loopholes in its rule of compliance. Unintended misapplication based on lack of understanding of the rule is understandable. Here the lack of training or wrong training is the culprit. But intended misapplication with skillful use of the knowledge of the rule for deliberate rejection is reprehensible. This is the deviant tendency that harms international trade and hampers economic development. It must be controlled. It can be controlled. ISBP is an attempt to control. It is a control mechanism. ISBP comes to clear confusion and uncertainties in UCP. It more or less plugs the loopholes. ISBP is UCP’s defense. ISBP guards UCP well against the intentions and tendencies to make the UCP scapegoat.   

Ravi Mehta, Ph.D.

Jee Meng Chen: What is Important - Content or Intent, relevant or sponge-all ?

Be it, regulations, rules, practices, etc., they would never stay in equilibrium. They are subject to periodic revisions, at one point in time or another, taking into consideration, the dynamism of the business environment. The same applies to the UCP without exception. It is, however, virtually impossible to cover all aspects of international trading practices and the potential risk issues in one document. If this were ever attempted, it would become a Dictionary instead of guidelines. Before a banking and/or trade practitioner starts "blaming" the UCP (for whatever shortcomings there may be), it is important to re-visit a fundamental question, "What is the intent behind the promulgation of the UCP standards?" Whilst the UCP provides a platform to facilitating international trade, one cannot expect the very same document to be all-and-encompassing. And neither can one expect the UCP to "harmonize" banking and trade practices. Outside the boundaries of the UCP articles resides "unlimited creativity". And assuming if a trade fails to materialize as envisaged, is it the fault of the: -

· UCP?

· Bankers / Structurers?

· Trading Parties?

In short, any methodology, framework or instrument has its inherent limitations. Similarly, while the UCP may have its own "weaknesses", trade practitioners and users of L/Cs should develop an intricate knowledge of the UCP, to understand what is workable and what is not "protected" under the regime. To make the fullest use of the UCP, we need to appreciate the framework for what it is (intended to be).