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Editor’s Note: In the garden of “definitions”
in the front yard of UCP 600, we find a new term “Honor”. One LC specialist
does not honor “Honor”. He is Jia Hao. He
doubts the relevance of “Honor”. The other specialist makes an honorable
mention of “Honor”. He is Kim Christensen. He
explains the necessity of “Honor”. It is interesting to know their opposing
views of doubt and support.
A trade law expert says: “The
concept of honor has not been coined by the UCP 600 Drafting group”.
“The UCP 600 honor seems to be a carbon copy of the Revised UCC Article 5
honor”.
For UCP ‘honor’ is a new term, but in the
legal world it’s an old term. Those who are familiar with the US law know
that “honor” is in existence much before it started appearing in the ICC
publications. UCP adopts, not invents, “honor”. Is UCP “honor” honorable?
No. Because of the imitation, which the trade law expert has discovered –
the imitation is always despicable, not laudable. Secondly, because of the
controversy whether for UCP it is necessary to adopt such term as one LC
specialist argues. Is “honor” workable? Yes. Whatever the origin of “honor”
in UCP, it may, however, facilitate understanding of UCP, of bank’s
responsibilities. The one term “honor” covers three kinds of payment actions
already in practice. The 3-in-1 term is thus easy to understand and use
particularly for exporters, who obviously show great interest in
understanding modes of payment and great concern for getting paid. Talking of getting paid, will the word “honor” work to
influence the banker’s mind and tendency from willful rejection to rightful
honor? Time will tell. Kim Christensen says that “‘honor” is a change
in the LC language and this linguistic change may change the mindset of the
banker.
Ravi Mehta, Ph.D.
The Story of Doubt and Support
He who knows nothing, doubts nothing
Spanish Proverb
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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?
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“Honor” changes the LC
language, not LC practice. When to translate it in a local language it may
be difficult.
Jia, you surprisingly question why we need "Honor"
in the UCP. As I see it, the fact is the “Honor” is here - in the UCP 600;
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. One
reason was that it included "available by payment, deferred payment and
acceptance”, a set of so many words, in so many articles. In the UCP 600 you
can just say one word: "Honor". To use honor or not, this may not matter
much if you are an LC expert like Jia Hao who has thoroughly read and
frequently quoted the UCP articles , may be 1000 times, and thus knows
exactly and completely what UCP says. If on the other hand, you are not an
LC expert – or perhaps are an exporter just trying desperately to find out
what is up and down of an LC – then “honor” may in fact be rather helpful
(just as the other “definitions” that you will find in UCP 600 article 2).
As I see it, the main advantage of the UCP 600 compared to UCP 500 is the
linguistic improvement. The UCP 600 is much easier to read and understand.
The only challenge with honor that I see is when the UCP 600 is translated.
I have heard examples where languages may not have a single word that will
“match” “honor”. If so you may need more than one words in the translation,
and by doing so a part of the whole idea may be lost.
I doubt that the introduction of honor will change
banking practice, but I feel confident that it will change the “LC language”
and thereby also the mindset of the LC banker. One interesting aspect of
honor is that the specific LC will not say that it is available by “honor” –
it will be specific, e.g. saying “by payment” – so “honor” will only seldom
be seen on LCs.
By the Way
The story of imitation
A trade law expert’s research on “honor”:
(The author’s job obligations do not allow us to
disclose his name. Anyway, what’s in a name? The views of the author are
more important than his name.)
Legislative History of
Honor
We all are familiar with the rules that condition
bank’s honor of complying documentary presentation solely upon the terms set
forth in the letter of credit that thereby assure the reliability of letters
of credit as a payment mechanism. But, what is the meaning and nature of the
bank’s action that constitutes honor?
Original UCC Article 5
The concept of honor has not been coined by the UCP
600 Drafting group; it has existed for decades in the American law, and even
non-American letter of credit practitioners should be familiar with this
notion. Original Uniform Commercial Code (UCC) Article 5 that was
promulgated in the 1950s defined letter of credit as an engagement by a bank
or other person made at the request of a customer that the issuer will honor
drafts or other demands for payment upon compliance with the conditions
specified in the credit. The engagement clause could either provide an
agreement to honor or a statement that the bank or other person was
authorized to honor. Original UCC Article 5 did not incorporate a
comprehensive definition of honor that would designate the acts of banks
that constitute honor in the way that UCP 600 does. The missing spot in the
Original UCC Article 5 was filled by UCC Article 1 that applies not only to
letters of credit, but also to other Articles within the Uniform Commercial
Code. Section 1-201(21) defined “to honor” as payment or acceptance and
payment, or where credit so engages purchase or discount of a draft
complying with the terms of the credit. The Original UCC Article 5 thus
recognized three types of honor that did not include incurring and
performance of a deferred payment undertaking, but listed negotiation of
drafts as a form of honor.
Revised UCC Article 5
This bifurcated approach changed with the revision
of UCC Article 5 in 1995 that incorporated a definition of honor in
5-102(8). The Revised UCC Article 5 honor means performance of the issuer’s
undertaking in the letter of credit to pay or deliver an item of value.
Unless the letter of credit otherwise provides, honor occurs (i) upon
payment, (ii) if the letter of credit provides for acceptance, upon
acceptance of a draft and, at maturity, its payment, or (iii) if the letter
of credit provides for incurring a deferred obligation, upon incurring the
obligation and, at maturity, its performance. Revised UCC Article 5 honor
thus includes three types of honoring complying presentation under a letter
of credit. Unlike its predecessor, it excludes negotiation and includes
performance under a deferred payment credit.
ISP98 honor
The concept seems to be broader under ISP98 where
Rule 2.01(b) provides that “an issuer honors a complying presentation made
to it by paying the amount demanded of it at sight, unless the standby
provides for honor: i) by acceptance of a draft drawn by the beneficiary on
the issuer, in which case the issuer honors by timely accepting the draft
and thereafter paying the holder of the draft on presentation of the
accepted draft on or after its maturity, ii) by deferred payment of a demand
made by the beneficiary on the issuer, in which case the issuer honors by
timely incurring a deferred payment obligation and thereafter paying at
maturity, and iii) by negotiation, in which case the issuer honors by paying
the amount demanded at sight without recourse. Unlike UCP 600 and the
Revised UCC Article 5, ISP98 seems to classify negotiation as a form of
honoring complying presentation. The ISP98 honor thus seems to represent the
broadest concept of honor with respect to other letter of credit rules.
UCP 600 honor
The UCP 600 honor seems to be a carbon copy of the
Revised UCC Article 5 honor. Similar to the Revised UCC Article 5, UCP 600
provides for three types of honor: a) to pay at sight if the credit is
available by sight payment, 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. Apparently, the UCP
re-drafters had been inspired by the Revised UCC Article 5 and transplanted
the definition from the U.S. law that also excludes negotiation form the
list of acts that constitute honor.
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