UCP 500 and 600

The GENERATION GAP 

By Ravi Mehta, Ph.D.

This newsletter compares UCP 500 (the Old) and 600 (the New) to pinpoint the differences and evaluates the differences to pinpoint their significance, their impact. There are 12 important points of differences between the Old and the New. The differences indicate the Old’s more or less confused, meaningless thinking; the New’s clear, logical, purposeful, meaningful, and relevant thinking.  The comparison between the Old and the New is the best way to learn about the New, says Jia Hao. (See LC VIEWS No. 90)

1. Definitions and Interpretations

UCP 500 has no definitions. We used to look to trade finance text books to understand the UCP terminology. UCP 600’s remarkable “structural change”, to use Gary Collyer’s words from his “Introduction” in UCP 600, is definitions at one place in article 2. UCP 600 redefines “negotiation” and adopts “honor” from the US law. “Honor” changes the LC language, not LC practice, says Kim Christensen (see LC VIEWS Newsletter No. 94).  About “interpretations” in article 3 of UCP 600, it is an attempt to pitchfork the existing interpretations from the backyard of UCP 500 to the front yard of UCP 600. The definitions and interpretations facilitate UCP learning and application. They are the first step to learning new rules. If you go deeper into the UCP without first knowing the definitions and interpretations lying at the entrance you will not be able to understand the rules lying at depths (see LC VIEWS Newsletter No. 93).

                                                       Definitions and interpretations

                                     First step for UCP application

                                                       Tools for LC administration

2. Standard for document examination

Comparison

UCP 500 article 13 (a). Banks must examine all documents stipulated in the credit with reasonable care, to ascertain whether or not they appear, on their face, to be in compliance with the terms and conditions of the credit.

UCP article 14 (a): A nominated bank acting on its nomination, a confirming bank, if any, the issuing bank must examine a presentation, on the basis of the documents alone, whether or not the documents appear on their face to constitute a complying presentation.

Conclusions

UCP 600 does not call for reasonable care. The words “reasonable care” are vague, irrelevant. It is good UCP 600 has deleted them.  UCP 600 emphasizes examination “on the basis of documents alone”. This makes examination focused. It cautions not to use extraneous considerations for examination and decision.

3. From Reasonable Time to Definite Time

Comparison

UCP 500 13b: The issuing bank, the confirming bank, if any, or a nominated bank acting on their behalf, shall each have a reasonable time, not to exceed seven banking days following the day of receipt of the documents, to examine the documents and determine whether to take up or refuse the documents and to inform the party from which it received the documents accordingly.

UCP 600  article 14 (b): 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 a 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. (See LC VIEWS No. 88.)

Conclusions

 UCP 500 is unreasonable when it says “reasonable time”. What’s reasonable time? Or how to determine reasonable time? It does not answer. The result? Controversial interpretations and practices. UCP 600 cures this malady .The change from “not exceeding seven banking days” in UCP 500 to  “a maximum of five banking days” in UCP 600 benefits the beneficiary. The lesser the time for examination the greater the scope for cash flow management. The definite time will promote sense of time management among banks.

4. Post-Refusal Responsibility

Comparison

UCP 500, article 14(d) i): If the issuing bank and/or Confirming Bank, if any, or a nominated bank acting other behalf, decides to refuse the documents, it must give notice to that effect by telecommunication or, if that is not possible, by other expeditious means, without delay but no later than the close of the seventh banking day following the day of receipt of the documents. Such notice shall be given to the bank from which it received the documents, or to the Beneficiary, if it received the documents directly from him.

14(d) (ii). Such notice must state all discrepancies in respect of which the bank refuses the documents and must also state whether it is holding the documents at the disposal of, or is returning to, the presenter.

UCP 600, article 16(c): When a nominated acting on its nomination, a confirming bank, if any, or the issuing bank decides to refuse to honor or negotiate, it must give a single notice to that effect to the presenter.

The notice 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.

The notice must be given by telecommunication or, if this is not possible, by other expeditious means no later than the close of the fifth banking day of presentation.

Conclusions

UCP 500 says “without delay”.  How to determine whether an action is without delay? It says “holding”. But why?  How long? UCP 600 clears the mess the UCP 500 makes. It does not say “without delay”. It explains reason for holding – for example holding pending further instructions from the presenter. The clarity and specificity in UCP 600 messages will make practices error-free, dispute-free. (See LC VIEWS No. 96)

5.From Authorization to Pay to Pay or Prepay

Comparison

UCP 500 article 10(d): By nominating another bank, or by allowing for negotiation by any bank, or by authorizing or requesting another bank to its confirmation, the Issuing Bank authorizes such bank to pay, accept Drafts(s) or negotiate as the case may be, against documents which appear on their face to be in compliance with the terms and conditions of the Credit and undertakes to reimburse such bank in accordance with the provisions of these article.

UCP 600: Article 12b: 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

Conclusions

UCP 500 did not allow prepayment in case of acceptance and deferred payment credits. There was only the option of “pay at maturity” and the old UCP thus deprived the beneficiary of the benefit of prepay, which he needs for cash flow. UCP 600 allows prepay – i.e. before maturity payment.

6. Change from Inconsistency to Conflict

Comparison

UCP 500 article 21: When documents other than transport documents, insurance documents and commercial invoices are called for, the Credit should stipulate by whom such documents are to be issued and their wording or data content. If the Credit does not stipulate, banks will accept such documents as presented, provided their data content is not inconsistent with any other stipulated document presented.

UCP 600 article 14(d). 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.

14(f): If a credit requires  presentation of a document other than a transport document, insurance document or commercial invoice, without stipulating by whom the document is to be issued or its data content, banks will accept the document as presented if its content appears to fulfill the function of the required document and otherwise complies with sub-article 14 (d) – see LC VIEWS Newsletter No. 88).

Conclusions

UCP 500 says “not inconsistent”. Does it mean “identical”? UCP 600 says “need not be identical” but “must not conflict with”. “Need not be identical” indicates that UCP 600 rule is flexible, adaptable - not strict, rigid or uncompromising. Strict compliance is not the intent  of UCP 600.It is expected that new UCP  will serve well to minimize document rejections

7. Original vs. Copy

Comparison

UCP 500 article 20b. Unless otherwise stipulated in the Credit, banks will also accept as an original(s), a document)s) produced or appearing to have been produced:

   i. by reprographic, automated or computerized systems;

   ii. as carbon copies;

provided that it is marked as original and, where necessary, appears to be signed.

A document may be signed by handwriting, by facsimile signature, by stamp, by symbol, or by any other mechanical or electronic method of authentication.

20(c)(i): Unless otherwise stipulated in the Credit, banks will accept  as a copy(ies), a document(s) either labeled copy or not marked as an original a copy(ies) need not be signed.

20(c)(ii): Credits that require multiple document(s) such as “duplicate”, “two-fold” and the like will be satisfied by the presentation of one original and the remaining number in copies except where the itself indicates otherwise.

UCP 600 17(b): A bank shall treat as an original any document bearing an apparently original signature, mark, stamp, or label of the issuer  of the document, unless the document itself indicates that it is not original.

17( c) : Unless a document indicates otherwise, a bank will also accept a document as original if it:

      . Appears to be written, typed, perforated or stamped by the document issuer’s hand; or

      . Appears to be on the document issuer’s original stationery; or

      . States that it is original, unless the statement appears not to apply to the document

        presented.

17(d). If a credit requires presentation of copies of documents, presentation of either originals or copies is permitted.

17(e) If a credit requires presentation of multiple documents by using terms such as “in duplicate”, “in two fold” or “in two copies”, this will be satisfied by the presentation of at least one original and the remaining number in copies, except when the document itself indicates otherwise.

Conclusions

According to UCP 500, a document is not original if not marked “original”. UCP 500 is fussy, inflexible, and bureaucratic.  As per UCP 600, may be original even if not marked “original”. UCP 600 is logical, flexible, and feasible.

8. Documents Lost in Transit

Comparison

UCP 500 article 16: Banks assume no liability or responsibility for the consequences arising out of delay and/or loss in transit of any message(s), letter(s) or document(s), or for delay, mutilation or other error(s) arising in the transmission of any telecommunication.

UCP 600 article 35. 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 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 (see LC VIEWS Newsletter No. 95).

Conclusions

According to UCP 500, loss of documents mean loss of hope of payment. UCP 600 says “must honor or negotiate even if documents lost in transit”. How friendly is UCP 600!

9. Multimodal Shipment

The point of difference is the sub-article 19 (iii) (a) in UCP 600.

UCP article 26(a): If a Credit calls for a transport document covering at least two different modes of transport (multimodal transport), banks will, unless otherwise stipulated in the Credit, accept a document, however named, which:

    iii. a. indicates the place of taking in charge stipulated in the credit which may be different from the port, airport or place of loading, and the place of final destination stipulated in the credit which may be different from the port, airport or place of discharge…

UCP 600 article 19 (ii)(a). A transport document covering at least two different modes of transport (multimodal or combined transport document), however, named, must appear to:

iii.  Indicate the place of dispatch, taking in charge or shipment and the place of final destination stated in the credit, even if,

   a. the transport document states, in addition, a different place of dispatch, taking in charge or shipment or place of final destination….

10. Transport Documents

Comparison (Bill of Lading)

UCP article 23(a): If a Credit calls for a bill of lading covering a port-to-port shipment, banks will, unless otherwise stipulated in the Credit, accept a document, however named, which:

ii. indicates that the goods have been loaded on board, or shipped on a named vessel.

Loading on board or shipment on a named vessel may be indicated by pre-printed wording on the bill of lading that the goods have been loaded on board a named vessel, in which case the date of issuance of the bill of lading will be deemed to be the date of loading on board and the date of shipment.

In all other cases loading on board a named vessel must be evidenced by a notation on the bill of lading which gives the date on which the goods have been loaded on board, in which case the date of on board notation will be deemed to be the date of shipment.

UCP 600 article 20(a). A bill of lading, however, named, must appear to:

ii. indicate that the goods have been shipped on board a named vessel at the port of loading stated in the credit by:

. pre-printed wording, or

. an on board notation indicating the date on which the goods have been shipped on board. 

Conclusions

See, how simple is UCP 600; how easy to understand it! How easy it makes the banking practice to examine the presentation!  UCP 500 says that   on board notation must indicate loading on board on a named vessel. UCP 600 says “no, it need not”. UCP 600 rules on transport documents are simple and clear. See, how difficult is UCP 500 for understanding and application! The beauty of UCP 600 is its simplicity. UCP 500 is rigmarole.

11. Advising Credit/Amendment

Comparison

UCP 500 article 7(a). … Shall take care to check the apparent authenticity of the Credit which it advises…

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.

Conclusions

UCP 500 asks the advising bank to check the apparent authenticity. UCP 600 does not use the word “check”. Rather it says if the bank advises it 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. Meaning, UCP 600 imposes two responsibilities: apparent authenticity and accurately, while UCP 500 imposed one responsibility – of authenticity. UCP 600 is thus more friendly in safeguarding the interests of the beneficiary. (See LC VIEWS No. 80)

12. Insurance Document

Comparison

UCP 500 article 34 (a): Insurance documents appear on their face to be issued and signed by insurance companies or underwriters or their agents.

UCP 600 article 28 (a): An insurance document, such as an insurance policy, an insurance certificate or a declaration under an open cover, must appear to be issued and signed by an insurance company, an underwriter or their agents or their proxies.  (see LC VIEWS Newsletter No. 86)

Conclusion

UCP 600 exemplifies insurance documents, deletes “appear on their face”, and allows proxy to sign. If UCP 600 exemplifies it is clear in its message. If it deletes “appear on their face”, it carries simple and relevant message. If it allows proxy to sign it means UCP 600 is flexible, adaptable to the trends in the insurance industry.