Impact of UCP 600

NEW UCP CHANGES LC LANGUAGE AND PRACTICE

By Ravi Mehta, Ph.D.

[LC VIEWS Newsletter N0.99; February 2007]

Changes in the Banking Language

UCP 600 triggers some changes in the LC language – some modifications, the other deletions. LC word speaks UCP language. The change in the UCP language brings change in the LC world’s language.  The UCP language is the mother-tongue of the LC specialists.  The UCP language is the international language of the LC world.

Modifications

HONOR. UCP introduces a new word in the documentary credit  banking language.  It is honor, which it borrows from the US law.  It is  used to group together the three old banking practices.  New UCP says in its article 2:

. Honor means:

       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.

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

             beneficiary and pay at maturity if the credit is available by acceptance

Now we don’t have to say so many words like:   to pay  at sight ,  or at maturity. Now we  say  one word:  to honor.   We used to say UCP 500 words “to pay, to incur a deferred payment undertaking, to accept Drafts), or to negotiate”.  Now we say  UCP 600 words “to honor or negotiate”. The new language is convenient. 

Complying presentation. Old UCP says “ in compliance with the terms and conditions of the credit” . The new UCP introduces the alternative  “complying presentation”, which it defines in its article 2:

 Complying presentation means a presentation that is in accordance with the terms and conditions of the credit, the applicable provisions of these rules and international standard banking practice.

 The old UCP’s language was tongue twisting. The new UCP language is simple, easy to utter.

On their face. From frequent to occasional use. UCP 500 frequently and habitually used these words in its text.  Now it is occasionally used in UCP 600  - where it is utmost  necessary. For example:

In Article 14 (a) of UCP 600 these words are used. They are used one time only in the entire text. “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 not the documents appear on their face to constitute a complying presentation”.                                                                 

Advancing of funds.  In defining negotiation the old UCP in its article 10(b)(ii) says “giving of value” . In redefining  negotiation in article 2 new UCP says  “ by advancing or agreeing to advance funds”.

Old definition: Negotiation means the giving of value for Draft(s) and/or documents(s) by the bank authorized to negotiate.

New definition.” Negotiation means 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”. The language of  this definition  is clear, specific, meaningful. The Old UCP was rigmarole.

Nomination. The old UCP says ‘a Nominated Bank acting on their behalf “. The new UCP says  “a nominated bank acting on its nomination”.  The new UCP’s language is respectful. The old UCP speaks more legal language. Its words “on their behalf”, “reserves the right” are the lawyer’s language, but the LC users are not lawyers.

Conflict. The old UCP says “ inconsistent with” (article 13a).  The  new UCP says “ may not be identical but must not conflict with” (article 14d):

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.

Prepay. The new UCP introduces the word “prepay” and this changes the practice of the nominated bank. The Old UCP says in article 10(d) “by nominating a bank…the issuing bank authorizes such bank to pay, accept Draft(s) or negotiate…

New UCP in its Article 12b says : 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 nominating bank.

Proxy. The new UCP brings into use the “word” proxy in the LC world’s language. This linguistic change also changes the document examination practice of the bankers. An insurance document signed by proxy is acceptable (article 28(a).

Deletions

The following words are no longer in use:

. Reasonable care

. Reasonable time

. Unless otherwise stipulated in the Credit

. Marine/Ocean in the name of bill of lading

. Transport documents issued by freight forwarders

Conclusion

New UCP’s language is polite. Old UCP was arrogant, bossy. Example? The old UCP says “banks…reserve the right to transmit credit terms without translating them (article 16). While the new UCP says “… a bank may transmit credit terms without translating them” (article 35).

The new UCP’s language clear and specific, old UCP’s confusing. The new UCP  says, for example, a maximum of 5 banking days (article 14).  The Old UCP was confusing. It says “a reasonable time,  not to  exceed…” (article 13).

Changes in the Banking Practice

To prepay: New UCP in its Article 12b allows  prepaying LC available by  acceptance or deferred payment. The new UCP  makes the banking practice liberal.

“ 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 nominating bank.”

The Old UCP made the banking practice restrictive as it did not allow prepayment of  an LC available by acceptance or deferred payment undertaking.

Accurate advice: UCP 600 article 9(b): By advising the credit or amendment, the advising bank signifies that it has satisfied itself as to the apparent authenticity of the credit or amendment and that the advice accurately reflects the terms and conditions of the credit or amendment received.

New UCP puts two responsibilities: authenticity and accuracy. And it allows a second advising bank.  The new UCP makes the advising practice more responsible and purposeful.

Lost documents. If a nominated bank determines that a presentation is complying and forwards the documents to the issuing or confirming bank, whether or not the nominated bank has honored or negotiated, an issuing bank or confirming bank must honor or negotiate or reimburse the 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 (article 35). The new UCP  makes banking practice more exporter-friendly.

Post-Refusal Holding of Documents:  A single notice  of refusal (article 16 (c)  must be given and it must state

i. that the bank is refusing to honor or negotiate; and

ii. each discrepancy in respect of which the bank refuses to honor or negotiate; and

iii.  a) that the bank is holding the documents pending further instructions from the presenter; or

       b) 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; or

       c) that the bank is returning the documents; or

       d) the bank is acting in accordance with instructions previously received from the presenter.

Definite time for document examination. 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 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 (article 14b).

The new UCP thus makes banking practice and the beneficiary’s cash flow more efficient.

Standard for document examination. The new UCP elucidates standard for document examination in its article 14. It will kelp make the banking practice of document examination more controversy-free, dispute-free, and honor-oriented. The Old UCP led to more documents rejections. The new UCP is trade friendly.

Conclusion

The new UCP is purpose-driven. So it makes the banking-practice purposeful.