An International Magazine For and By LC Specialists

[Vol. 3; No. 10; October 2006]

SOUR-GRAPES THEORY OF UCP

"… Forced to like what you get if you don’t try to get what you like"

“UCP may not have become a star in heaven
but it has certainly become a lamp at home”

Zahoor Dattu

Head of Corporate Services
Abu Dhabi Commercial Bank, U.A.E.

I am looking forward to perfect UCP

But I am not sure if this can be achieved

Jee Meng Chen

Risk management specialist

United Overseas Bank, Singapore

Simply speaking, simple and workable UCP is the perfect UCP

Kim Christensen

Trade finance specialist, Nordea, Denmark

The banker is the right artist for shaping simple UCP

T.O. Lee

LC Consultant, Canada

Editor’s Note: Sour-Grapes Theory vs. Can-be-Done Theory

In LC world mostly believe that UCP can never be perfect. T. O. Lee understands that the idea of perfect UCP is too idealistic. Jia Hao’s opinion is that UCP can become better through revision but never perfect. Jee Meng Chen wonders: “I am looking forward to a PERFECT UCP, but I am not sure if this can be achieved”. Kim Christensen finds that it is against the very nature of UCP to be perfect. Abdulkader Bazara compares: “UCP is like a teenager that may mature without perfection”. All these views are like saying grapes are sour. This theory, called rationalization in psychology, advises to reconcile to the situation. That is, use the UCP as it is because you are supposed to use it instead of waiting for perfect UCP, which is like a wild goose chase. Zahoor Dattu says if you don’t get what you like you are forced to like what you get. He likens present UCP to lamp at home, and not to star in heaven, that despite being not perfect still serves to remove darkness (ignorance) in LC world. It is right to say so. Something is better than nothing to remove darkness. The present UCP though imperfect still works to give more or less right direction to the LC practice. When we are not able to achieve the intended result – perfect UCP - we take refuge in rationalization, saying “intended result not achievable”, “mission impossible”. We blame the result and its nature. A bad craftsman always blames the tools and not his technique. To blame his technique is to blame himself. It’s human nature not to blame himself but him. To blame others is the world’s old habit. The sour-grapes theory indicates defeat in the pursuit for perfect UCP. However, we still expect the perfect result because we need it. And, we strive to achieve it. But without knowing, assessing or reviewing whether or not the technique we use is perfect. Hence, we fail to achieve what we want. We overlook the weaknesses in the technique in our enthusiasm to achieve the intended result. LC world is so obsessed with sour-grapes theory, i.e. can’t-be-done theory, that it is ignoring can-be-done theory, its possibility. We don’t bother about the “can-be-done theory”. May be because there is a confirmed belief, based on the long experience, that since there has been no perfect UCP since its origin despite periodic revisions perfect UCP can never be done because it cannot be done. Wrong thinking, in my understanding. Perfect UCP can be done. It requires determination. It requires right objective and right technique. The imperfect UCP indicates something is wrong with the way we make UCP. What is made will not be perfect if how we make is not perfect. The defective impliedly indicates the need to improve the technique. The artist – ICC – needs to improve its art of making perfect UCP. But how? To understand “how” we need to understand what “perfect” means. To understand the meaning of “perfect” is to understand the right objective. To understand the right objective is to understand the right technique to achieve the right objective. If you don’t know what to make you don’t know how to make. If the objective is not right the technique will not be right. Perfect UCP can be done if the technique is perfect. In Kim Christensen’s understanding, perfect UCP means a kind of UCP that is simple and workable. Simple UCP means a kind of UCP that is easy to understand. Workable means effectively applicable. Workable UCP is a kind of UCP that is clear and specific, and purposeful. A workable UCP being clear and specific can lead to discrepancy-free presentation, controversy-free presentation examination, and to litigation-free payment or reimbursement as end-result. This is what we expect from perfect UCP. That’s why, we expect and need perfect UCP. Therefore, we should make perfect UCP. An imperfect UCP can’t swim the best however hard it may try. An imperfect UCP is confusing. It can confuse the best. It cannot work all the best. It may work effectively more or less – more where the UCP is clear and less where it is confusing. The existing imperfect UCP is a mixture of clear and confusing rules. It is the confusing rules that are debated by the LC specialists, clarified by the ICC, litigated by the UCP users. An imperfect UCP cannot make the LC specialist swim the best in the pool of LC operations. An imperfect UCP can never be like one arm man determined to swim the best, to use Pere Ubu’s words from his quote: All the world is like one arm man swimming hard the best he can (see LCVIEWS newsletter 57, September 2006).

T. O. Lee suggests that for making a simple UCP the banker is the right artist. The art of simplification is not simple. If the simplification is inept it may lead to confusion and controversy. Simple but not clear indicates lack of the art of simplification. The clarity should be the objective of simplification and not its victim. T. O. Lee is of the opinion that the lawyer is not the right artist for making UCP because he will make a kind of UCP that will be too difficult to understand and thus may not be workable. But the lawyer is the right person for achieving the objective of clarity. The lawyer can offer the interpretations, implications and clarifications. That is, he can judge very well the workability of the rule the banker drafts. Thus, if both the banker and lawyer work as a team perhaps we can achieve both the objectives of “simple and clear”. Simple, clear and relevant UCP is the perfect UCP. UCP must be perfect at birth. The perfect UCP is relevant to the situation. If the situation changes the UCP no doubt becomes imperfect as Jee Meng Chen says. But we have process to restore the relevance and perfection. It is the interim process called amendment, which is used till the time comes for thorough revision as ultimate remedial process. We must make perfect UCP. We must keep it perfect.

N. D. George’s view that UCP cannot please all the constituencies tempts me to suggest reform in the ICC way of making UCP in order to reduce the number of constituencies. The ICC has a closed system of UCP revision. In the system are national committees. Good. We must have them. A national committee is an important base. We must have their views. It is good that the way of UCP making is democratic. But in addition, I understand we should have regional committees in the system to articulate the views of national committees from the region. It is the regional committees that should have the task of interest articulation on the ICC and not the national committees. The regionalization can facilitate interest articulation on the ICC. The national committees should have say in bottom-to-top approach but not in top-to-bottom approach. A regional committee must get views from the constituent national committees. ICC must have a representative from each regional committee on its Drafting Group. The regional representative should be the adequate source for regional views for formulation and finalization of the draft The Drafting Group need not ask the regional committees/national committees for their views on the draft, because during drafting stage it can get views from the regional representatives. Regionalization will cut delay in draft finalization. For draft formulation there should be bottom-to-top approach. But for draft finalization there should not be top-to-bottom approach.

The other alternative is an open system, in which the Draft can be opened to public for discussion. LC VIEWS Newsletter No. 59, September 2006, debates this kind of system. Marek Dubovec raises the point of open-door method that UNCITRAL uses for rule making. T. O. Lee tells in the debate why the ICC prefers the closed-door policy or method for rule making.

I end my discussion with a question. It is said practice makes man perfect. I wonder: why the ICC has not yet become perfect artist to make perfect UCP despite its periodic practice of UCP revision? Perhaps the UCP could be perfect if the ICC adopts bottom-to-top approach to draft formulation and no top-to-bottom approach to draft finalization in its closed system; or if it takes to open system or open-door policy and opens the draft for public discussion.

Ravi Mehta, Ph.D.

Editor, LC VIEWS

T. O. LEE: Perfect UCP is idealistic

To expect perfection in any rules, UCP 600 included, is too idealistic.

First and foremost, the articles of UCP 600 cannot be watertight as they are drafted mainly by bankers who are not lawyers. So it is understood that the language used is layman and not in a legal manner. Some experts suggest the UCP be drafted by lawyers. They have forgotten the original intention of the UCP, which is used mainly as a set of simple and customer friendly rules to codify the international banking practices. It is only a default set of rules and parties who have different requirements may modify or exclude a particular article, as stipulated in article 1 of UCP 500 and 600.

If the UCP were to be drafted by lawyers, legal jargons and even Latin would be unavoidable. This would discourage the traders to use it to govern their LCs because they don't understand what exactly a particular paragraph means. No trust, no application... It is that simple.

In fact, if watertight legal version is really needed to avoid disputes, it should be drafted by the United Nations, such as the United Nations Convention on Standby Letter of Credit and Guarantees that is endorsed by ICC, Paris. If a particular country is interested to codify the local banking practice in its law system, it may follow the USA practice by providing the USA Federal Uniform Commercial Code Article 5. Each state in USA is allowed to modify or exclude the federal version of the UCC Article 5. Hence it is not easy to litigate in USA as different states may have different versions of the UCC Article 5. And we have about 40 states in USA.

This is the right way to do it. In a nutshell, we have three layers of rules. There is a user-friendly version provided by ICC, a convention provided by the United Nations and a local legislation provided by the country. This is like going to a French restaurant. We have butter knife, fish knife, steak knife, spoon and fork. For a fish dish cooked in soup, the Michelin 3 star French restaurant, such as Alain Ducasse, has a special fish knife that can be used for cutting the fish (as a knife) and for drinking the soup (as a spoon). UCP is like a pair of chopsticks. If you wish to drink soup please use the porcelain Chinese spoon!

KIM CHRISTEN: Perfect UCP - ICC could not do it because it lacked Direction

I do accept that the two mentioned theories exist, and also acknowledge that your mental aim will determine how far you reach; i.e. if you have low goals you will not come as far as your potential in fact is. So naturally I am not a believer in the Sour Grape Theory. As for the “can-be-done” theory I have my reservations as well; especially if what “can be done” is to produce a “perfect” UCP. The problem with is the word “perfect”. To me this is like saying: “We will paint this car in the color blulow – and then we will let a number of people determine whether or not the car is in fact blulow”. I think that most people would want to see a sample of what this color looks like, as there is no universal description. As I see it “perfect” is a lot like “blulow”, with the exception that most people knows the word “perfect” – but I bet if people started to define “perfect” the answers would be just as different if the same people started to define “blulow”.

Another issue is time. The “perfect bike” from 1960 – will be considered far from perfect now. So the perception of “perfect” will change over time. This is the same as the UCP: Practices change – and so should the UCP.

So my conclusion is that “perfect” only make sense if you define it – especially if you are to have it as a goal.

Ever since the revision of the UCP 500 started I have had one major concern; namely that the revision lacked a strategy – a direction(1) . The only thing that was said prior to launching the work was that it should be a “technical revision”. It has surely proved to be anything else than that, since very single word has been changed. I think the work could have benefited a lot from having a statement as detailed as possible as to what they would expect to achieve. It seems that the only criteria to measure the success are whether or not the UCP 600 is approved in October.

So “perfect” may be fine – if that is the goal – but in that case it should be defined / broken down into something much more practical, that is actually possible to measure – and thereby set direction after.

These goals may aim high – no problem there, but just at the UCP the goals must be worded as clear and simple that everyone will understand them … the same way … which goes back to my perception of “the prefect UCP”, namely that they should be “simple” and “workable”(2) . You many however see it quite different.

Footnotes:

1: Article in LC Monitor Volume 6, Issue 2, and March-April 2004:”What time is it?”

2: See ” Kim Christensen - How to Judge Perfection” available on: http://www.lcviews.com/kim_christensen_ucp_perfect.htm  

JIA HAO: Better but not perfect

Regarding UCP, it seems much is being talked about. Nonetheless, here I would like to say more about its nature. What is UCP? UCP is not law. It is a set of "Uniform Customs". It is a set of uniform customs for handling documentary letter of credit by banks and traders. But it is summarized, drafted, and revised by bankers only based on many nations of banking practices of documentary credit. But it even cannot be safely concluded that it is a trade usage. Does it describe trade usage or prescribe trade usage? Does it really reflecting actual practices? Should there be no uniform practices; may UCP prescribe trade usage to provide harmonization for making documentary credit transactions efficient, prompt and fair? In this sense, it may not be perfect, as the prevailing practice is not static. So, it may be a right way for us to do our best to revise UCP for the purpose of reflecting real prevailing practices to greatest extent. A series of UCP Revisions (UCP222, UCP290, UCP400, and UCP500) just evidenced such effort. So in this connection, we may describe the UCP vividly as one-arm swimmer to cater for the running water of variable practices. Therefore, it can be done better but not perfectly.

JEE MENG CHEN: Try, try again – but if perfect today, tomorrow again it may be imperfect

Try. The UCP may come out good, but not perfect. Try again. The UCP may be better, but still not perfect. Try again. The UCP may be the best, but still not perfect. Try again - but with perfect technique, not the best, technique. Perhaps perfect UCP may come out as a result. We must try with the perfect technique. To improve the result without improving the technique is an exercise in futility. My expectation is that with the perfect technique there could be perfect result, but at the same time I fear that the state of "perfection" is difficult to achieve because there will always be unforeseen issues and compelling circumstances. And not forgetting that while rules are static, the human variable is highly dynamic. The state of "imperfectness" is a reality. A reality that no bankers and/or trade practitioners can proclaim mastery of. It is the constant state of "imperfectness" that draws out our desire to keep improving and refining. If, one day, by chance the UCP attains "perfection", let us be cognizant that, it is "perfection" for a limited period of time. The situation keeps on changing. And in the new situation perfect UCP may be no longer be perfect.

Coming to the question of what is perfect, the definition of "PERFECT" is paramount. But bankers, trade practitioners and traders may define "PERFECTION" in varying ways. Is the realm of "perfection" defined by say,

(i) reduction in L/Cs litigations [be it documentation-related discrepancies and/or interpretation of roles and responsibilities]?

(ii) reduction in documentary frauds?

(iii) increased facilitation of international trading through the use of L/Cs?

Or is it a combination of the above?

To conclude, while I am looking forward to a PERFECT UCP, but I am not sure if this can be achieved.

ZAHOOR DATTU: UCP is better as a lamp on earth if not the best as a star in heaven

The article was very interesting. However, I would conclude by quoting a famous saying "Try to get what you like or you would be forced to like what you get". This is what one gets when the technique of drafting of UCP is not proper. However, I would still respect UCP for many reasons as it is one of the documents that are respected by all the bankers. There is also another famous saying that “If you cannot be a star in heaven be a lamp at home". Indeed though new UCP may not become a heaven in star, yet it has become a lamp at home which gives light to the needy and brings them out from darkness (ignorance). Well done ICC, but always promise and excel high enough to bring out a good document, though I know it is a tough job.

ABDULKADER BAZARA: UCP is struggling for perfection

I would consider UCP as a teenager who passed the childhood and puberty phases and is struggling his / her way through life to reach maturity which may or may not get to perfection.

N. D. GEORGE: UCP can never be please- all

There can never be a UCP that pleases all the constituencies. Whether it is going to be born without one arm or both, well - in fairness to the drafting group, we can only say when we see it.