UCP 600

The UCP 600 has come into effect from July 1, 2007 onwards and UCP 600 has a number of substantial changes that affect not only how banks will determine compliance, but also how contracts for sales utilizing Letter of Credits should be written. Some of the new articles in UCP 600 have adopted practices in International Standard Banking Practices (ISBP) and followed principles of International Standby Practices (ISP 98), besides providing new articles in examination, documentation and other aspects for issuing the letters of credits for banks involved in foreign exchange.

"UCP" is the common reference for the Uniform Customs and Practice for Documentary Credits. The objective of the UCP is to create a set of contractual rules that would establish uniformity to conflicting national regulations.

The Uniform Customs and Practices (UCP) for Documentary Credits were first issued in 1933 by the International Chamber of Commerce. The purpose was to overcome conflicting national laws on letters of credit as well as to bring about uniformity in banking practices. The rules have been revised a number of times. The recent revision, UCP 600, took more than three years of consultation and the Consulting Group, which comprised more than 40 representatives from 26 countries proposed changes to the various drafts. During its 24-25 October 2006 meeting, the ICC Commission on Banking Technique and Practice approved new UCP 600 rules for documentary credits.

UCP 600 vs. UCP 500

UCP 600, which came into effect on July 1, 2007, incorporates a number of changes from the UCP 500 that was followed by banks for more than a decade till June 2006. These changes include:

• A reduction in the number of articles from 49 to 39
• New articles on "Definitions" and "Interpretations" providing more clarity and precision in the rules
• A definitive description of negotiation as "purchase" of drafts of documents
• The replacement of the phrase "reasonable time" for acceptance or refusal of documents by a maximum period of five banking days
• New provisions allow for the discounting of deferred payment credits
• Banks can now accept an insurance document that contains reference to any exclusion clause

Some of the important changes in UCP 600 and their implication for banks in handling letter of credit transactions are highlighted below:

UCP 600 does not apply by default to letters of credit issued after July 1st 2007. A statement needs to be incorporated into the credit (LC), and preferably also into the sales contract that expressly states it is subject to these rules. Article 1 of UCP 600 also leaves open the possibility for either party to exclude the application of any part of UCP 600 as long as the exclusion is stipulated in the credit.

Revocable Credits (Article 2)

One of the most important changes in UCP 600 is the exclusion of any verbiage regarding revocable letters of credit, which can be amended or canceled at any time without notice to the seller. .Actually, Article 2 explicitly defines a credit as "any arrangement, however named or described, that is irrevocable and thereby constitutes a definite undertaking of the issuing bank to honour a complying presentation."

Article 3 states that "A credit is irrevocable even if there is no indication to that effect." and Article 10 makes it clear that "a credit can neither be amended nor cancelled without the agreement of the issuing bank, the confirming bank, if any, and the beneficiary" (seller).Therefore, it is prudent for the seller to stipulate in the sales contract that the "buyer will open an irrevocable letter of credit", and to check that the buyer's credit does, in fact, either describe itself as "irrevocable" or state that it incorporates UCP 600 (without exclusion).

Definitions and Interpretations (Articles 2 and 3)

The earlier UCP 500 did not include a section defining the various terms used in the rules. UCP 600 has rectified this in order to enable more consistent interpretation. It also has included an article that clarifies types of signatures that are acceptable, as well as terms used to describe LC issuers, and other terms, like "prompt", "immediately", "as soon as possible", which will be disregarded under the new rules. A new section of Definitions and Interpretations has been introduced in the UCP 600. This includes definitions of "Advising bank", "Applicant", "Banking day", "Beneficiary", "Complying presentation", "Confirmation", "Confirming bank", "Credit", "Honour", "Issuing bank", "Negotiation", "Nominated bank", "Presentation", "Presenter".

In addition to that, the following terms are now clearly defined : "singular/plural", "irrevocable", "signatures", "legalizations", "Branches of a bank", "Terms describing issuer of a document", "Prompt etc", "on or about", "to", "until", "till", "from", "between", "before", "from", "after", "first half", "second half", "beginning", "middle", "end".

Availability and expiry - Article 6

Banks have been known to make credits available by drafts drawn on applicants, believing that the obligation to accept and pay will fall directly on the applicant and not the issuing bank. UCP 600 specifically retains the same position as that of UCP 500 but in more forceful terms, that a credit 'must not' be issued in terms that make it available by a draft drawn on an applicant. That does not prevent an issuing bank calling for such a draft as part of the documents required. A credit must now also state an expiry date for presentation and any dates stated for honour or negotiation will be deemed to be an expiry date for presentation.

Deferred payment undertakings - Articles 7 and 8

The discounting of deferred payment credits before maturity is expressly recognized in an attempt to resolve concerns arising out of a court case in which the Court held that where a confirming bank discounted its own deferred payment undertaking and fraud in the documents was established prior to the maturity date, the issuing bank was not obliged to reimburse the confirming bank. Articles 7 and 8 establish a definite undertaking by issuing and confirming banks to reimburse on maturity whether or not the nominated bank prepaid or purchased its own acceptance or deferred payment undertaking before maturity.

Article 12(b) expressly provides authority from an issuing bank to a nominated bank to discount (prepay or purchase) a draft that it has accepted or a deferred payment undertaking that it has given.

Advising of credits - Article 9

At present an advising bank only has to verify the apparent authenticity of the credit that it has advised. Under art 9(b) it has to certify that the document that it advises to the beneficiary is the same document that it received. The obligation is also extended to any second advising bank.

Amendments - Article 10

The position under article 9(d)(iii) of UCP 500 has been maintained in Article 10 under UCP 600. Article 10 now deals exclusively with amendments and article 10(c) provides: '… The beneficiary should give notification of acceptance or rejection of an amendment. If the beneficiary fails to give such notification, a presentation that complies with the credit and to any not yet accepted amendment will be deemed to be notification of acceptance by the beneficiary of such amendment. As of that moment, the credit will be amended.' Thus, a beneficiary is deemed to have given notice of acceptance of a proposed amendment upon presentation of compliant documents.

Time Allowed Banks for Document Review (Article 14)

Under UCP 500, banks have a "reasonable time … not to exceed seven banking days" in which to honor or dishonor documents. UCP 600 shortens the period to a maximum of five "banking days". However, Article 2 defines a banking day as "a day on which a bank is regularly open at the place at which an act subject to these rules is to be performed."

Non-Matching Documents (Article 14)

The previous LC rules required documents that were "on their face" inconsistent with one another to be rejected as discrepant.. Article 14(d) provides the standard for examination of documents generally. It seeks to resolve the problem of inconsistency in data by clarifying that there is no need for a mirror image but rather: 'Data in a document, when read in context with the credit, the documents itself and international standard banking practice, need not be identical to, but must not conflict with, data in that document or any other stipulated document.'

Regarding addresses on the various documents, Article 14 indicates that they do not have to exactly match as long as the country is the same. The only exception is when addresses appear as part of the consignee or notify party details on a transport document, in which case they must be the same as stated in the credit.

Examination of documents:

The standard for examining documents has also been in focus. This is reflected in article 14, and here are a few examples from that: Banks now only have 5 banking days to accept or refuse documents. This replaces the "Reasonable time not exceeding 7 banking days".The period for presentation (usually 21 days) only applies to original transport documents. This means that if only a copy or no transport document is required by the credit, and a period for presentation is requested, then the credit should expressly state that the document should be presented within a certain period of time from a defined moment or event. Addresses of beneficiaries and applicants need no longer be as mentioned in the documentary credit. They must however be within the same country. Contact details (Like phone and fax numbers) may be disregarded - and if stated they need not be as in the credit. An exception to this is where the address and the contact details are used in transport documents as part of the consignee or notify party. In that case they must be as stated in the credit.

Non-Documentary Requirements

Under UCP 600, Banks should disregard all non-documentary requirements. This means that any requirement in the credit that is not specifically part of a required document will be ignored by the bank in determining conformity.

An example:

The buyer wants the product delivered and the LC paid only if the product is shipped on a vessel carrying a specific classification. It is not enough, under UCP 600, for the buyer to state the requirement in the LC. He must actually require that the bank receive a copy of the vessel's certification certificate.

In the case of documents other than transport/insurance documents or commercial invoices, art 14(f) states: '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).' Both sub-articles provide an element of subjectivity and so the onus will be on the applicant and issuing bank to ensure that the credit specifically deals with anything that is specifically required.

Complying presentation - article 15

Under UCP 500 it was not apparent when an issuing or nominated bank had to start the settlement process. Under UCP 600 it is clear that this begins when the bank determines that a presentation is compliant.

Discrepant documents, waiver and notice - Article 16

Under UCP 500 a bank which refuses documents has the option of holding them at the presenter's disposal or handling them in accordance with the presenter's prior instructions, such as to return them. Problems can arise where a bank serves a refusal notice and at the same time seeks instructions from the applicant to release documents on obtaining a waiver of discrepancies. That can be particularly disadvantageous where the beneficiary wants to be consulted before the bank acts on the applicant's waiver, for example, if the market goes up. It is also inconsistent with the only two options available under UCP 500. Article 16 now encompasses additional options designed to avoid banks sitting on discrepant documents and issues relating to forced waivers.

The options (which are alternatives) are as follows:

• hold documents pending further instructions from the presenter; or
• hold 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 return the documents; or act in accordance with instructions previously received from the presenter. There is no provision for payment under reserve or indemnity.

Original Documents (Article 17)

There was considerable confusion under UCP 500 regarding the definition of "original documents". Article 17 of the new rules attempts to define original documents with more precision. An original document will be any of the following:

"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 an original. OR any document that appears to be written, typed, perforated or stamped by the document issuer's. OR any document that appears to be on the document issuer's original stationery OR any document that states it is original, unless the statement appears not to apply to the document presented." Many of those were of course defined/interpreted in the UCP 500 as well, but for the first time they are placed together for a far better overview.

Transport documents: Articles 19-24

The transport articles have been redrafted under advice of a group of "transport experts". The requirement that a bill of lading must show that goods are shipped on board a named vessel has been made much simpler which will hopefully lead to less confusion. The option that a "Multimodal transport operator" can sign a multimodal transport document has been removed. The background is that this option was not utilized. It is now acceptable that a "Charterer" (or a named agent on behalf of the charterer) can sign a Charter Party Bill of Lading. If an agent signs on behalf of a "Master" on a Charter Party Bill of Lading then the name of the master need not appear from the document.

The articles of UCP 500 relating to transport documents have been revamped to resolve confusion over the identification of carriers and agents. Under UCP 600 a generic set of rules generally applies to all transport documents (other than charterparty bills of lading). These include the following:

• The document must indicate the name of the carrier and be signed by: (a) the carrier or named agent for or on behalf of the carrier; or (b) the master or named agent for or on behalf of the master .
• Any signature by the carrier, master or agent must be identified as that of the carrier, master or agent.
• Any signature of an agent must indicate whether the agent has signed for or on behalf of the carrier for or on behalf of the master.
• There is no need to name the master.
• In the case of charterparty bills of lading :
• These no longer need to indicate the name of the carrier.
• They may now also be signed by the charterer, although it is difficult to envisage a situation where an FOB buyer/ applicant would wish to rely on a bill of lading signed by the seller/beneficiary and vice versa in the case of a CIF sale.
• Transport documents also no longer need to bear the clause 'clean' in order to comply with any credits that require a document to be 'clean on board'.

Insurance documents - article 28

Documents providing for wider coverage than stipulated in a credit will be acceptable. Banks will also be able to accept an insurance document that contains reference to any exclusion clause. For the insurance documents the following has been changed: "Proxies" can now sign on behalf of the insurance company or underwriter. Percentage to be covered will be understood as a "minimum" coverage required. The document may contain reference to any "exclusion clause". The risks must be covered at least between the shipment points stipulated in the credit.

Force majeure - Article 36

Despite suggestions for an option to allow a grace period of five banking days after a bank reopens for the presentation of documents, the position remains as it was under UCP 500 -i.e. banks will not honour or negotiate under a credit that expired during the force majeure event.

eUCP

The eUCP was developed to accommodate the electronic presentation of documents. At present it features as a supplement, amended to identify its relationship with UCP 600 on the basis that many articles are not affected by the presentation of the electronic equivalent of paper documents.

UCP and SWIFT formats:

Traditionally, SWIFT groups all its MT standards changes in one annual standards release, usually in October or November. In 2007, this will be on 27 October. In other words, the 1 July 2007 effective date of the UCP 600 does not coincide with the implementation date of SWIFT's Standards Release 2007.The 'SWIFT UCP 600 Guidelines' provide guidance to banks on how to use today's category 7 standards in compliance with UCP 600.This means that the only way to let the ICC and SWIFT 'live' dates coincide and to publish how the UCP 600 affects category 7 standards was by issuing 'SWIFT UCP 600 Guidelines' that financial institutions can start using as soon as the UCP 600 rules go 'live'. All guidelines are based on the use of narrative text in existing fields. This should ensure a seamless transition to the new rules.

The November 2006 SWIFT release caters for the UCP 600 using today's existing category 7 messages. A new mandatory field 40E Applicable Rules contains codes to indicate adherence to specific rules. Other changes as described below will be implemented in October 2007. The SWIFT UCP 600 Guidelines will be reflected in the official Standards Release 2007 documentation (Standards Release Guide and User Handbook) of 27 October 2007.

Changes that banks can use from 1 July 2007

1. Date and place for presentation of documents under a credit

1. Field 31D "Date and Place of Expiry" of the MT 700, 705, 710, 720 and 740 The definition of this field should be interpreted as follows: "This field specifies the latest date for presentation under the documentary credit and the place where documents may be presented." This guideline does not change the usage of this field.
2. Field 41a "Available With... By..." of the MT 700, 705, 710 and 720 The definition of this field should be interpreted as follows: "This field identifies the bank with which the documentary credit is available (the place for presentation) and an indication of how the credit is available." This guideline does not change the usage of this field.

2. Expiry dates in reimbursement authorizations (or amendments thereof)

1. Field 31D "Date and Place of Expiry" of the MT 740 The following usage rule should be added: "This field should not be used to specify the latest date for presentation of a reimbursement claim or an expiry date for the reimbursement authorization."
2. Field 72 "Sender to Receiver Information" of the MT 740 The following usage rule should be added: "Any latest date for a reimbursement claim or an expiry date for the reimbursement authorization should be indicated in this field and not in field 31D.
3. Field 31E "New Date of Expiry" of the MT 747 The following usage rule should be added: "This field should not be used to specify a new latest date for presentation of a reimbursement claim or a new expiry date for the reimbursement authorization."
4. Field 72 "Sender to Receiver Information" of the MT 747 The following usage rule should be added: "Any new latest date for a reimbursement claim or a new expiry date for the reimbursement authorization should be indicated in this field and not in field 31E."

3. Details about the disposal of documents in a notice of refusal

Any details regarding the disposal of documents for which the two existing code words "HOLD" and "RETURN" in field 77B "Disposal of Documents" of the MT 734 Notice of Refusal cannot be used, must reflect the content of article 16.c of UCP 600 as follows:

1. The code word "NOTIFY", to signify 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."
2. The code word "PREVINST", to signify that "The bank is acting in accordance with instructions previously received from the presenter."

Because the contents (including code words) of field 77B "Disposal of Documents" of the MT 734 are not centrally validated (i.e., checked) by SWIFT Net, users may start using the above codes as of 1 July 2007 (live date of UCP 600). Alternatively, field 77B may contain a narrative text, reflecting the content of article 16.c of UCP 600

Precautions for Exporters & Importers :

The documentary letter of credit (credit) is an important and well-established instrument for securing payments in international trade. However, to ensure smooth processing it is vital for exporters /beneficiaries to fulfill the terms and conditions of the credit exactly and to present complying documents to the bank. Even minor discrepancies or errors can result in the honouring of the documents being delayed or prevented altogether. It is always important to check the credit very carefully as soon as customers receive it to ensure that it conforms to the underlying contract and that the terms and conditions can be met. If necessary it is possible to have the credit amended accordingly.Banks have to educate their customers in this regard.

The following checklist would help customers to adhere to the terms and conditions of the credit and to prepare complying documents.

General documentary credit conditions

• If the credit stipulates a latest date of dispatch: were the goods shipped in time?
  
• Can the deadline for presenting the documents to the bank be met?(Under UCP 600 Art. 14 c this is 21 days after the date of shipment, unless the credit states otherwise and an original transport document is required)
  
• Are all documents presented in the prescribed number (originals and copies)?
  
• Does the invoice amount match the credit amount, i.e. is it not higher or lower or within the permitted tolerances? (UCP 600 Art. 30)
  
• Is the supplied quantity consistent with the credit? (UCP 600 Art. 30)
  
• Are the terms of delivery (e.g. INCOTERMS 2000) consistent with the credit?
  
• Does the credit prohibit partial shipments?
  
• Does the credit prohibit transshipment?
  
• Are the markings, weights, quantity, type and dimensions of the packages consistent throughout the documents?
  
• Are the descriptions of goods, services and performance consistent throughout the documents?.
  
• If documents are required to be presented in a particular language: Is this document obtainable in the required language?

Conclusion

With billions of dollars in trade each year reliant on letters of credit, it is essential to maintain a clear set of ground rules governing the rights and obligations of the parties involved. UCP 600, in its leaner form, has sought to reduce the scope for misinterpretation and misapplication, primarily by placing the onus on the issuer to be precise in its terms. It is not, however, a complete code and is subject to wider international standard banking practice and will not be without its own teething problems.