lcviews CoronAdvice #9: The article 35 controversy
The new blogpost in the segment “lcviews CoronAdvice” aims to address one of the questions that has arisen during the clovid-19 crises – and the guidance given in handling the situations where it Is not possible to forward the documents from a nominated bank to a confirming bank or an issuing bank. In such situation, does UCP 600 article 35 apply?
Some context:
April 7, 2020 the ICC issued the “Guidance paper on impact of covid-19 on ICC Trade Finance rules”.
This is a really thorough document that offers guidance on a number of issues relating to the problems and challenges that have arisen during the clovid-19 crises. One of the key challenges (as discussed in previous “lcviews CoronAdvice”) is that it may not be possible to forward the documents (under a documentary credit subject to UCP 600) to a bank located in a country in lockdown.
Section B of the ICC guidance document covers the “[i]nteraction between a non-confirming nominated bank that has no responsibility to examine, honour or negotiate, and a confirming / issuing bank”. Likewise, section C of the ICC guidance covers the “[i]nteraction between a confirming bank and the issuing bank”.
The scenarios (iii), (iv) and (v) under the two above mentioned sections takes the outset that the documents cannot be sent; i.e. because the courier company refuses to receive it. For example, Section B (iii) reads:
“NB is unable to hand over to any courier service as they are unable to deliver and will not accept any package for delivery.
NB is covered by UCP 600 article 35 as the documents could have been handed over to the courier, but the courier service cannot collect or deliver—it is not responsible for any delay in delivery.
Documents remain with NB. NB should contact the issuing bank to seek new routing instructions for the documents.”
The above guidance (as well as the ones that relates to (iv) and (v)) starts with the wording “NB (i.e. the nominated bank) is covered by UCP 600 article 35..”
It seems that this wording has attracted some attention, as it can be discussed whether or not UCP 600 article 35 applies to a situation where the documents have not actually been sent from the nominated bank.
Again, some context may be appropriate:
UCP 600 article 35 reads:
“Disclaimer on Transmission and Translation
A bank assumes no liability or responsibility for the consequences arising out of delay, loss in transit, mutilation or other errors arising in the transmission of any messages or delivery of letters or documents, when such messages, letters or documents are transmitted or sent according to the requirements stated in the credit, or when the bank may have taken the initiative in the choice of the delivery service in the absence of such instructions in the credit.
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 honoured or negotiated, an issuing bank or confirming bank must honour 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.
A bank assumes no liability or responsibility for errors in translation or interpretation of technical terms and may transmit credit terms without translating them.”
The view that article 35 does not apply, is based on the argument that the documents are in fact not “lost in transit” – since it has not been possible to deliver the documents to the courier company.
In the past, UCP 600 article 35 has attracted much attention; mostly because paragraph 2 so explicitly places the risk of documents lost on transit on the issuing bank (on the condition that a complying presentation has been made to a nominated bank).
Again, some context is in place:
The first two paragraphs of UCP 600 article 35 should be understood together with UCP 600 article 7 – and article 8 for that matter. UCP 600 article 7 opens as follows:
“Provided that the stipulated documents are presented to the nominated bank or to the issuing bank and that they constitute a complying presentation, the issuing bank must honour…” [the article then lists different scenarios based on availability.]
As a consequence, already at the time when a complying presentation is made to the nominated bank – the issuing bank is obligated to honour. This is before the nominated bank has called the courier company asking them to pick up the documents to take them to the issuing bank. This means, that even without UCP 600 article 35, the nominated bank – and the beneficiary – would be “protected” by the UCP 600 – in the sense that the problem in sending the documents is in reality the problem of the issuing bank. However, UCP 600 article 35 offers a key principle, that is important:
The disclaimer in UCP 600 article 35 – paragraph 1 (the bank assumes no liability …) assumes that the documents are transmitted or sent according to the requirements stated in the credit. This of course means, that if the nominated bank wants to maintain the “protection” (as described above), it must walk a fine line:
Either, send the documents according to the requirements in the documentary credit (as reflected in article 35 – paragraph 1) OR seek new instructions from the issuing bank AND act according to the new instructions.
In other words, IF the nominates bank decides to send the documents to the issuing bank in a manner that is NOT according to the requirements stated in the credit AND the documents are lost, THEN the risk of documents lost in transit between the nominated bank and the issuing bank is on the nominated bank / beneficiary.
For that reason, in the situation where the nominated bank cannot comply with the requirements in the documentary credit, the opening of UCP 600 article 7 (quoted above) cannot “stand alone”. It must be read together with UCP 600 article 35.
As a consequence of the above, if one were to take the position that for the scenarios mentioned above in the “Guidance paper on impact of covid-19 on ICC Trade Finance rules” that UCP 600 article 35 does not apply and that the nominated bank is not “covered” by the article, then that would leave the nominated bank and the beneficiary in a “void” in respect of the actual handling of the documents that cannot be sent according to the requirements in the documentary credit. If one were to take that position, it would in fact create a really strange dilemma.
A thought-experiment:
* A complying presentation is made to the nominated bank. However, it is not possible to send the documents. If one assumes that UCP 600 article 35 does not apply (but article 7 does), then this could lead a (practical oriented) nominated bank to find an alternative way to get the documents to the issuing bank. This “alternative” may well “contradict” the requirements in the credit.
* If the nominated bank sends the documents in such “alternative” way (i.e. not according to the requirements in the credit), then at that point in time UCP 600 article 35 will in fact apply – and the nominated bank may have a problem. For example, if the documents are lost in transit.
As can be seen from this thought-experiment the argument that article 35 does not apply when the documents cannot be handed over to the courier simply is not sustainable. Taking the position that UCP 600 article 35 does apply, will – on the other hand – guide nominated banks to act in a correct and prudent manner, that will ensure that the obligation of the issuing bank is maintained. In other words, protecting both themselves and the beneficiary.
Of course, the ICC “Guidance paper on impact of covid-19 on ICC Trade Finance rules” does not go into the above “technicalities”, but the conclusion that “NB is covered by UCP 600 article 35” is – as argued above – actually correct.
Takeaways:
* The first two paragraphs of UCP 600 article 35 should be understood together with UCP 600 article 7.
* Already at the time when a complying presentation is made to the nominated bank – the issuing bank is obligated to honour.
* If the nominated bank wants to maintain the “protection” (as described above), it must walk a fine line. Either, send the documents according to the requirements in the documentary credit (as reflected in UCP 600 article 35 – paragraph 1) OR seek new instructions from the issuing bank AND act according to the new instructions.
Look out; more “lcviews CoronAdvice” to come.
Meanwhile – as always, take care of the LC – but take special care of each other during these difficult times.
Kind regards
Kim