Presentation on theme: "Interpretation and Application of UCP 600 – Part 1"— Presentation transcript:
1 Interpretation and Application of UCP 600 – Part 1 XXV Latin American Foreign Trade Congress - CLACEGuatemalaJune 3-5, 2009Gary CollyerCollyer Consulting LLP
2 Understanding the main rules of UCP 600 and a review of the Applying UCP 600 and ISBPUnderstanding the main rules ofUCP 600 and a review of theimportant and critical opinions givenunder UCP 600
3 Applying UCP 600 and ISBP Concept of “Modify or Exclude”; UCP 600 article 1 - Application of UCPConcept of “Modify or Exclude”;No reference to “unless otherwise stipulated in the credit” throughout UCP 600;UCP applicable when the LC expressly indicates that it is subject to these “rules”; andRetention of Standby Letters of Credit.There is a need to understand the concept of modification andexclusion and when it is appropriate or not.
4 Applying UCP 600 and ISBP Negotiation: UCP 600 article 2 - DefinitionsNegotiation:the purchase by the nominated bank ofdrafts (drawn on a bank other than thenominated bank) and/or documents under a complyingpresentation, by advancing or agreeing to advance funds to thebeneficiary on or before the banking day on which reimbursement isdue to the nominated bank.Q. What is agreeing to advance?Q. Why no reference to recourse?Q. Why “on or before the banking day reimbursement is due ….”?
5 Applying UCP 600 and ISBPUnderstanding recourseHaving confirmed a LC, the confirming bank has no right of recourse to the beneficiary in the event of default by the issuing bank, or the issuing bank subsequently identifying discrepancies that were not determined by the confirming bank.But what form of recourse is available where the documentary credit is notconfirmed?Recourse when the issuing bank fails to provide reimbursement according to the terms of the credit citing bankruptcy, lack of foreign exchange, Government intervention etc.and (?)When the issuing bank identifies discrepancies in documents that the nominated bank failed to determine.
6 Applying UCP 600 and ISBP Honour is to: Understanding recourse – LC available by “Honour” with a nominated bank(not confirmed)Honour is to:Pay, if the LC is available by sight payment;Accept a draft drawn on the bank, if the LC is available by acceptance; orIncur a deferred payment undertaking, if the LC is available by deferred payment.To pay, accept or incur a deferred payment undertaking is a commitment onthe part of the nominated bank and is considered without recourse to theBeneficiary. For payment LCs a separate recourse agreement may,however, be made with the beneficiary
7 Applying UCP 600 and ISBP Sub-article 6 (a): UCP 600 article 6 - Availability, Expiry Date and Place for PresentationSub-article 6 (a):A credit must state the bank with which it is available or whether itis available with any bank. A credit available with a nominated bankis also available with the issuing bank.Q. Why allow any form of LC to be available with any bank?Q. Is it really possible under each type of availability for a LC to be available with any bank?Q. What is the value to a beneficiary of a LC available with any bank?
8 Applying UCP 600 and ISBP with an issuing bank; Understanding the correct form of availabilitywith an issuing bank;with a confirming bank;with a nominated bank;with an issuing bank and confirming/nominated bank;with issuing/confirming bank for expiry and nominated bank forhonour or negotiation;for presentation only.Banks need to understand ‘availability’ and what it means in each transaction.
9 Applying UCP 600 and ISBPSub-article 7 (c) – ICC Opinion TA. 674 approved March 2009The conclusion to this opinion (as to the effect of extending a maturity dateof a draft or deferred payment undertaking) includes:“Whether a replacement draft or new deferred payment undertaking isrequired will be determined by local law at the place of acceptance or wherethe deferred payment undertaking is incurred.” if not required then“the draft must be re-accepted to mature on the new agreed maturity date(where the credit is available by acceptance with the confirming bank); ora new or amended deferred payment undertaking must be incurred to reflectthe new agreed maturity date (where the credit is available by deferredpayment with the confirming bank).” continued
10 Applying UCP 600 and ISBPSub-article 7 (c) – ICC Opinion TA. 674 approved March 2009The conclusion to this opinion (as to the effect of extending a maturity dateof a draft or deferred payment undertaking) concludes by saying:“By complying with the above, and in line with the definition of honour inarticle 2, i.e.,“b. to incur a deferred payment undertaking and pay at maturity if the creditis available by deferred payment”; and“c. to accept a bill of exchange (“draft”) drawn by the beneficiary and pay atmaturity if the credit is available by acceptance,the obligation of the issuing bank to reimburse the nominated (confirming)bank, according to sub-article 7 (c), extends to the new agreed maturitydate.”
11 Applying UCP 600 and ISBPUnderstanding the risks when acting in a non-nominated capacityIt is often the case that a bank will act for its client under a transactionwhere they are not stated to be the nominated bank or the LC is notdesignated as being ‘available with any bank’.The issuing bank must still honour a complying presentation made by that ‘non-nominated’ bank, but the issuing bank may seek confirmation from a named nominated bank (of no prior payment) before honouring;The non-nominated bank has no greater protection from UCP 600 as does the beneficiary in the delivery of documents to the issuing bank – article 35 would not apply.The examination of documents by the non-nominated bank carries no value within the context of UCP 600 and any settlement thereunder is outside the scope of UCP 600.
12 Applying UCP 600 and ISBP considerations to add confirmation; Adding confirmation – what is possible and what needs to be observedconsiderations to add confirmation;reduced expiry;reduced amount;determining confirmation of 100% where a split schedule is included in the LC;more than one confirming bank.The basic rule for a bank requested to confirm is “do I understand what I amconfirming and the risks that I am undertaking”
13 Applying UCP 600 and ISBP Concept of 2nd Advising Bank; UCP 600 article 9 - Advising of Credits and AmendmentsConcept of 2nd Advising Bank;Bank now “satisfies itself” as to the apparent authenticity; andAdvice of LC or amendment “accurately reflects” the terms and conditions of the LC or amendment received.Are instructions to confirm addressed to the advising bank and/or thesecond advising bank that is stated in the LC?What is ‘satisfying itself’ as to the apparent authenticity?What are the risks of not passing to the beneficiary what was received?
14 Applying UCP 600 and ISBP Sub-article 10 (c): UCP 600 article 10 – AmendmentsSub-article 10 (c):The terms and conditions of the original credit (or a credit incorporatingpreviously accepted amendments will remain in force for the beneficiaryuntil the beneficiary communicates its acceptance of the amendment to thebank that advised such amendment. The beneficiary should givenotification of acceptance or rejection of an amendment. If the beneficiaryfails to give such notification, a presentation that complies with the creditand to any not yet accepted amendment will be deemed to be notification ofacceptance by the beneficiary of such amendment. As of that moment thecredit will be amended.Q. Effect of banks requesting a beneficiary certificate certifying as to which amendments have been accepted or rejected.
15 Applying UCP 600 and ISBP Let us review the circumstances of a LC: UCP 600 article 10 - AmendmentsLet us review the circumstances of a LC:LC issued for USD25,000 covering shipment of nuts and bolts.Partial shipment allowed.Amendment received reducing amount to USD15,000Beneficiary subsequently presents documents for USD15,000 and the LC isvalid for another 5 weeks.Has the amendment been accepted or has a partial shipment been effected?
16 Applying UCP 600 and ISBP Consider the UCP 600 position in article 12: Nomination and acting under a nominationConsider the UCP 600 position in article 12:Nominated bank may obligate itself under an unconfirmed credit if expresslycommunicated to beneficiary.Receipt or examination and forwarding of documents does not constitutehonour or negotiation.Q. what is nomination?Q. what is “a nominated bank acting on its nomination”?
17 Applying UCP 600 and ISBP Silent Confirmation agreement What constitutes an ‘express communication to the beneficiary’?Silent Confirmation agreementAgreement or Commitment to Negotiate/Purchase/Honour etc.An indication, in any ‘written’ communication to the beneficiary, that the bank “will” honour or negotiate - as opposed to a statement on a covering advice to the LC that states something like “This credit is available with us by negotiation”.
18 Applying UCP 600 and ISBP Sub-article 12 (b): UCP 600 article 12 - NominationSub-article 12 (b):By nominating a bank to accept a draft or incur a deferred paymentundertaking, an issuing bank authorizes that nominated bank to prepay orpurchase a draft accepted or a deferred payment undertaking incurred bythat nominated bank.Note:Only applicable where nominated bank accepts a draft or incurs adeferred payment undertaking.An authorization not an obligation to prepay or purchase.
19 Applying UCP 600 and ISBP Sub-article 14 (a): UCP 600 article 14 - Standard for Examination of DocumentsSub-article 14 (a):A nominated bank acting on its nomination, a confirming bank, if any,and the issuing bank must examine a presentation to determine, onthe basis of the documents alone, whether or not the documentsappear on their face to constitute a complying presentation.Q. What is the scope of “check on the basis of the documents alone”?
20 Applying UCP 600 and ISBP Sub-article 14 (b): UCP 600 article 14 - Standard for Examination of DocumentsSub-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 daysfollowing the day of presentation to determine if a presentation iscomplying. This period is not curtailed or otherwise affected by theoccurrence on or after the date of presentation of any expiry date or last dayfor presentation.Q. Removal of “reasonable time” but does not maximum give a ‘reasonable time’?Q. Can a beneficiary hold a nominated bank responsible if the documents are presented 2 days prior to expiry but examined 2 days after expiry and discrepancies are found that the beneficiary is now unable to correct?
21 Applying UCP 600 and ISBP Sub-article 14 (d): UCP 600 article 14 - Standard for Examination of DocumentsSub-article 14 (d):Data in a document, when read in context with the credit, thedocument itself and international standard banking practice, need notbe identical to, but must not conflict with, data in that document, anyother stipulated document or the credit.Note:No reference to inconsistency.Data need not be identical, but must not conflict.
22 Applying UCP 600 and ISBP Sub-article 14 (d): UCP 600 article 14 - Standard for Examination of DocumentsSub-article 14 (d):LC calls for shipment of 5000 MT Stainless Steel CoilsInvoice states 5000 MT Stainless Steel CoilsCertificate of Origin states Stainless Steel CoilsBill of Lading states 5000 MT CoilsData is not identical but is it conflicting?
23 Applying UCP 600 and ISBP Sub-article 14 (d): UCP 600 article 14 - Standard for Examination of DocumentsSub-article 14 (d):LC calls for shipment of 5000 MT Stainless Steel CoilsInvoice states 5000 MT Stainless Steel CoilsCertificate of Origin states Stainless Steel CoilsBill of Lading states 5000 MT Aluminium CoilsData is not identical but is it conflicting?
24 Applying UCP 600 and ISBP Sub-article 14 (d): UCP 600 article 14 - Standard for Examination of DocumentsSub-article 14 (d):LC calls for shipment of 5000 MT Rice of Indian and Sri Lankan originPartial shipments allowedFirst drawing:Invoice states 3500 MT Rice Indian OriginCertificate of Origin states Rice Indian OriginBill of Lading states 3500 MT RiceData is not identical but is it conflicting?
25 Applying UCP 600 and ISBP Sub-article 14 (f): UCP 600 article 14 - Standard for Examination of DocumentsSub-article 14 (f):If a credit requires presentation of a document other than a transportdocument, insurance document or commercial invoice, without stipulating bywhom the document is to be issued or its data content, banks will accept thedocument as presented if its content appears to fulfil the function of therequired document and otherwise complies with sub-article 14 (d).Q. What are the requirements for a document to appear to fulfil its function?Q. Are document checkers supposed to become experts in documentation?
26 Applying UCP 600 and ISBP Sub-article 14 (f): UCP 600 article 14 - Standard for Examination of DocumentsSub-article 14 (f):How to determine a document fulfils the function of the required document?LC requires presentation of Inspection Certificate and Certificate of Analysis(no other details given).Inspection Certificates states “We hereby certify that we have inspected[STOP RIGHT HERE] …”Analysis Certificate states “We have analysed the consignment [STOPRIGHT HERE] …”the documents fulfil the function by the opening statements. The remainderof the document is subject to review according to sub-article 14 (d).
27 Applying UCP 600 and ISBP Sub-article 14 (h) UCP 600 article 14 – Standard for Examination of DocumentsSub-article 14 (h)If a credit contains a condition without stipulating the document toindicate compliance with the condition, banks will deem suchcondition as not stated and will disregard it.Issues:1. Understanding the impact on the applicant2. Ability of the issuing bank to enhance the wording in the LC3. Action required by the beneficiary4. Examination of such terms by a nominated bank
28 Applying UCP 600 and ISBPSub-article 14 (h) – ICC Opinion TA. 644 approved April 2008The conclusion to this opinion (as to the effects of a non-documentarycondition that is misstated in one or more documents) includes:“According to sub-article 14 (h), banks will deem a non-documentarycondition as not stated, (on the basis that there is no necessity forthe beneficiary to provide any evidence of compliance) and willdisregard it. Should the beneficiary, nevertheless, elect to insertsuch data on any other stipulated document then they must ensurethat it does not conflict with the data in the credit. The view of theBanking Commission is that sub-article 14 (h) is not absolute and isqualified by the content of sub-article 14 (d).”
29 Applying UCP 600 and ISBPSub-article 14 (h) – ICC Opinion TA. 644 approved April 2008Simple examples to demonstrate the effect of the opinion given in TA.644:-LC states in additional conditions:Vessel must be less than 25 years old.Goods must be packed in 25KG steel drums with red stripeBill of Lading includes within the body of the document “Vessel built in 1980”Packing list states “Goods packed in heavy duty plastic drums with redstripe”In both instances, the documents would be discrepant.
30 Applying UCP 600 and ISBP Sub-article 14 (j): UCP 600 article 14 - Standard for Examination of DocumentsSub-article 14 (j):When the addresses of the beneficiary and the applicant appear in anystipulated document, they need not be the same as those stated in the creditor in any other stipulated document, but must be within the same country asthe respective addresses mentioned in the credit. Contact details (telefax,telephone, and the like) stated as part of the beneficiary’s and theapplicant’s address will be disregarded. However, when the address andcontact details of the applicant appear as part of the consignee ornotify party details on a transport document subject to articles 19, 20, 21, 22,23, 24 or 25, they must be as stated in the credit.Q. Addresses must appear on every document, even if different?Q. Is any address required at all?
31 Applying UCP 600 and ISBPUCP 600 article 19 - ICC Opinion TA. 650 approved April 2008The conclusion to this opinion (enquiring as to the need for an onboard notation on a MMTD type document) includes:“A dated on board notation is clearly required when the credit so requests. Itis also required when the document evidences the first leg of the carriage asa sea shipment from the place stated in the credit.Where a transport document is pre-printed shipped on board then the date ofissuance would be deemed to be the date of shipment. When the documentevidences the first leg of the carriage as a sea shipment from the placestated in the credit, there is a need for evidence of the date the goods wereshipped on board i.e., pre-printed or by notation.”
32 Applying UCP 600 and ISBPUCP ICC Opinion TA. 675 approved March 2009 regarding release of cargoclausesThis opinion draws a line between the data that is to be examined forcompliance and that data which is considered to be terms andconditions of carriage.For example, data referring to the on board nature of the bill of ladingis to be examined. However, data referring to the action of the carrierin the release of the cargo is considered to be terms and conditionsof carriage.
33 Applying UCP 600 and ISBPUCP 600 article 20 - ICC Opinions TA. 635 approved October 2007and TA.665 & 667 approved October 2008There is no wording in UCP 600 that is similar to that whichappeared in UCP 500 sub-article 23 (a) (ii), but ……….The conclusions to the above opinions include:“Unless it is evident from the bill of lading that the shipped on boardstatement applies to the vessel and the port of loading, the bill of lading willrequire an on board notation showing the port of loading and the name of thevessel, even if the goods are loaded on the vessel named in the bill oflading.”
34 Applying UCP 600 and ISBP For example: UCP 600 articles 20 and 21 - Bill of Lading / Non-Negotiable Sea WaybillFor example:LC requires shipment from Rotterdam to Puerto QuetzalBill of lading shows:Pre-carriage [blank]Place of receipt AmsterdamOcean vessel River SunPort of loading RotterdamPort of discharge Puerto QuetzalBL marked “Shipped on board 25 May 2009” – Is this okay?
35 Applying UCP 600 and ISBP For example: UCP 600 articles 20 and 21 - Bill of Lading / Non-Negotiable Sea WaybillFor example:LC requires shipment from Rotterdam to Puerto QuetzalBill of lading shows:Pre-carriage [blank]Place of receipt Rotterdam CYOcean vessel River SunPort of loading RotterdamPort of discharge Puerto QuetzalBL marked “Shipped on board 25 May 2009” – Is this okay?
36 Applying UCP 600 and ISBP Revised wording: UCP 600 articles 20 and 21 - Bill of Lading / Non-Negotiable Sea WaybillRevised wording:If the bill of lading [non-negotiable sea waybill] does not indicate the port ofloading stated in the credit as the port of loading, or if it contains theindication “intended” or similar qualification in relation to the port of loading,an on board notation indicating the port of loading as stated in the credit, thedate of shipment and the name of the vessel is required. This provisionapplies even when loading on board or shipment on a named vessel isindicated by pre-printed wording on the bill of lading [non-negotiable seawaybill].
37 Applying UCP 600 and ISBP For example: UCP 600 articles 20 and 21 - Bill of Lading / Non-Negotiable Sea WaybillFor example:LC requires shipment from Rotterdam to Puerto QuetzalBill of lading shows:Pre-carriage River SunPlace of receipt RotterdamOcean vessel River MoonPort of loading DubaiPort of discharge Puerto QuetzalBL marked “Shipped on board 25 May 2009” – Is this okay?
38 Applying UCP 600 and ISBPUCP 600 article 22 - ICC Opinion TA. 662 approved October 2008The conclusion to this opinion states that any indication of a charterparty will be considered as making the transport document a charterparty bill of lading for the purposes of UCP 600. This applies even if thetransport document otherwise complies with article 20.For example, wordings such as:“Issued pursuant to charter party dated …… [no date]”“Freight paid as per charter party”will be considered as evidence of an indication of a charter partyeven if the charter party reference or date is not inserted.
39 Applying UCP 600 and ISBPUCP 600 article 22 - ICC Opinion TA. 683 approved April 2009Does a credit that requires the presentation of a charter party bill of ladingand the respective charter party contract modify the rule in sub-article 22 (b)that says “A bank will not examine charter party contracts, even if they arerequired to be presented by the terms of the credit”? Is a bank required toexamine, cursorily or otherwise, to establish that the contract relates to thecharter party bill of lading?The conclusion to both these questions was NO. The objective of sub-article22 (b) is to discourage the requirement for the contract to be presented inthe first place.
40 Applying UCP 600 and ISBPDocumentary Credits allowing different forms of transport/transport documentThe conclusion to ICC opinion TA.641 refers to situations where the LCallows for various forms of transport document i.e., in the case of theopinion, consignment notes, bill of lading or forwarding agents receiptevidencing shipment from Gdynia, Gdansk or Swinoujscie to Russia, andstates:“It should be noted that the credit, in allowing for different forms of delivery,should have provided for the individual requirements where consignmentnotes, bills of lading or a goods receipt were to be presented.”
41 Applying UCP 600 and ISBPUCP 600 article 31 - Partial Drawings or ShipmentsA presentation consisting of more than one set of transport documentsevidencing shipment commencing on the same means of conveyanceand for the same journey, provided they indicate the same destination,will not be regarded as covering a partial shipment, even if theyindicate different dates of shipment or different ports of loading, placesof taking in charge or dispatch.(b) Clarification given that in the case of multiple presentations, on same means of conveyance and same journey, latest date = date of shipment; and(b) Clarification where more than one means of conveyance used within the same mode of transport (i.e., 2 trucks) and one or more sets of transport documents presented = partial shipment.
42 Applying UCP 600 and ISBP If a nominated bank determines …….. an UCP 600 article 35 – Disclaimer on Transmissionand TranslationIf a nominated bank determines …….. anissuing bank or confirming bank must honouror negotiate, or reimburse ……., even whenthe documents have been lost in transitbetween the nominated bank and the issuingbank or confirming bank, or between theconfirming bank and the issuing bank.Q. Honour without documents?Q. Insist on replacement originals?Q. Insist on copies being provided?
43 Applying UCP 600 and ISBPDocumentary Credits stating that issuing bank charges are for account of thebeneficiaryThe conclusion to ICC opinion TA.659 states, where a credit specifies thatthe issuing bank’s charges (except issuance fees) are also for account of thebeneficiary:“The credit stated that all banking charges except those related to theopening were for the account of the beneficiary. If the issuing bank wishes tomake a deduction from the proceeds in respect of their fees, then the creditshould clearly indicate the amount or percentage of charges that will bededucted. It will then be for the beneficiary to decide whether it will performunder the credit with such a charge for its account.”
44 Thank You Applying UCP 600 and ISBP Contact : Gary Collyer, Collyer Consulting LLP