The Pros and Cons of UCP 600

L/C Monitor, Volume 8, Issue 6, November - December 2006

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First of all, there are no sets of rules in this world that are perfect. Different regions have different practices, needs, and local legislations. Hence, the UCP 600, as a set of international rules to govern letter of credit operations, has its own limitation. A lot of people look to the UCP as the ‘Bible’ and expect it to resolve all the disputes arising out of letter of credit operations without understanding that this would be a ‘mission impossible.’ There are lots of issues that are outside the scope of UCP, for example, local legal requirements for bills of exchange, frauds, rights and obligations between the applicant and the issuing bank (not covered by UCP 600 article 7 on whether the issuing bank has the right to claim for reimbursement from the applicant where the issuing bank has paid the nominated negotiating bank that has negotiated the deferred payment undertaking before maturity and fraud is uncovered before maturity), validity or effectiveness of a document, and the like.
Participating as a member of the UCP 600 Consulting Group, and witnessing the way the UCP 600 is drafted, I came to understand that the UCP 600 is merely a set of compromised provisions among different ICC National Committees. For example, the Drafting Group prefers that compliance should not need consistency among documents but this position is rejected by most of National Committees. So now sub-article 14 (d) states that the data content of all required documents must be mutually consistent. In another example, the Drafting Group took into consideration the fact that many non-banks also issue credits. Hence earlier drafts referred to banks as ‘parties’ but this was rejected by most of the National Committees. Ultimately the word ‘banks’ replaced ‘parties.’
But the voices of the National Committees are not always heard. For example, most National Committees wished to keep the practice of capitalizing terms like ‘Credits,’ ‘Applicant,’ ‘Beneficiary,’ ‘Confirming Bank,’ and the like, but the Drafting Group refused to listen and these terms are now not capitalized for the first time in the history of UCP. Their reason was that this reflected the current practice. However, some commented that the Drafting Group only hears what it wants to hear.
As a neutral party, I feel that the UCP 600 is inclined to protect the interests of the banks, rather than to treat all parties fairly and equally. This is a natural outcome if one looks at the background of the members of the Drafting Group. The Drafting Group has 11 members; 4 from Europe, 1 from the U.S.A., and 1 from Singapore, who are mostly bankers, as well as 2 lawyers from Europe, 2 from SWIFT in Europe, and 1 from the ICC administration, also in Europe.
Now one can see that it is dominated by bankers and Europeans just as it was in the days of UCP 400 or 500.
Ironically, credits are used less frequently in Europe, the U.S.A., and Singapore, yet they are the drafters of the UCP 600. Credits are used extensively in the Middle East and China but there are no representatives from these areas included in the Drafting Group. At one point the bankers from Europe and the U.S.A. proposed to delete ‘negotiation.’ I am among those from the Middle East and Asia who believe that negotiation is the lifeblood in credits. It is a relief that negotiation has now been retained in the UCP 600.
However, there is improvement in the drafting process. For the first time in the history of UCP drafting, a Consulting Group has been created. It has 40 members from 26 countries, consisting of bankers, consultants, experts, scholars, lawyers, judges, carriers, insurers and representatives from FIATA and BOLERO. The Consulting Group has two main functions: first, to balance out the strong influence by bankers and Europeans in the Draft Group; second, to provide input into non-bank areas of knowledge and experience, such as transport, cargo insurance, Incoterms, commodity trade, and legalities.
There are overall improvements in the transport articles. Some of my suggestions have been incorporated. For example, when an agent signs for the master, the name of the master need not be given. This is to reflect the shipping practice in Asia where the master and other key crew members are provided by a human resource agency and hence the name of the master may not be known until the ship sets sail. Another suggestion to delete the outdated description ‘port-to-port’ in bill of lading article has also been accepted as often some part of the carriage may be on land, using the ‘land-bridge’ mode. Cargoes from Hong Kong to New York may be discharged in San Francisco and carried by train across American to New York to save both time and costs by avoiding passing through the Suez or Panama Canal. But some of my suggestions have not been taken, for example, I felt there was no need to require a full set of originals for sea waybills since delivery can be made without any sea waybill, but against identity of the consignee. As the sea waybill is not a title document, there is no difference between holding a copy and holding an original. Hence it is not appropriate to treat a non-title document (sea waybill) in the same way as a title document (bill of lading).
The ICC/UNCTAD Rules for Multimodal Transport Documents, ICC Publication No. 481, is also applicable to unimodal (one mode) transport as well as multimodal (more than one mode) transport. Based on this fact, under article 19 in the UCP 600, if the multimodal transport document does not specify the number of modes of transport used, such multimodal transport document is nevertheless acceptable and this should not be deemed to be a valid discrepancy. This is an opinion I heard from an ICC expert, but it is not reflected in the provisions of the UCP 600. Nevertheless this view is an improvement on the interpretation of multimodal transport documents from bankers. I hope that this point will be clarified in the ‘UCP 600: The Commentary,’ ICC Publication No. 680, to help in the reduction of discrepancies after the effective date of UCP 600, 1 July 2007.
In article 24, the different modes of transport, road, rail, and inland waterway, are still grouped under one article despite some National Committees’ suggestion to split them into three separated articles. However, the content of the new consolidated article has shown some compromise. Provisions for these different modes of transport are now separated in the related sub-articles to avoid confusion.
In the cargo insurance article, the term ‘goods’ should be replaced with ‘cargo’ because in the insurance document, the goods become cargo. This applies to transport documents as well. But my suggestions were not heard and the term ‘goods’ is still being used in cargo insurance and transport articles in the UCP 600. No wonder I hear some comment that the drafters only listen to what they want to hear.
As reflected by the Transit Clause 8.1 within the Duration Clause in Institute Cargo Clauses (A), (B), and (C), the effective date of an insurance document is based on the occurrence of a specific event (commencement of transport) rather than the issuing date of the cargo insurance document. This is a cornerstone principle in indemnity insurance, as opposed to benefit insurance, such as life, motor, and health insurance, where the effective date is stated in the insurance document. Despite my repeated suggestions to respect the trade practices in cargo insurance, yet there has been no change to sub-article 28 (e) of UCP 600.
In the future, if an insurance document bears good linkage to either the commercial invoice (description of the goods, quantity, country of origin, specifications, etc.) or the transport documents (name of vessel, voyage number, shipping marks, weight and measurement, container number, etc.) or both, then the insurance document should be effective from the time of commencement of transport, regardless as to whether or not the issuing date of the insurance document is one or two days behind the shipment date as shown on the related transport document. Based on the provisions of the Institute Cargo Clauses (A), (B), or (C), particularly under the Transit Clause 8.1, however, the insurance document is valid from the shipment date.
If it were rejected by the issuing bank based on the issuing date of the insurance document alone, I have reason to believe that the presenter or the beneficiary would seek resolution in a court of law that would put more emphasis on the insurance provisions than the UCP 600 provisions, since the document is after all an insurance document in substance, although it is presented under a credit subject to UCP 600.
If a judicial decision were made in favour of the presenter, which I am confident it would be, then the ICC Banking Commission would be required either to issue a statement to match the judicial decision or to publish an official opinion in response to a query from an ICC National Committee that has shown concern over the judicial decision.
It is disappointing that there has not been much change to article 38 on transferable credits, despite the fact that transferable credits has been one of the main sources of discrepancies in UCP 500.
To circumvent the decision of the Santander case of the U.K., a new concept of ‘honour’ is created. Whether such a change will be effective in protecting negotiation of deferred payment credits where fraud has surfaced before maturity, only time will tell.
Some popular terms, such as ‘negotiation,’ ‘banking day,’ ‘complying presentation,’ ‘confirmation,’ and the like are now defined under article 2. I hope this will reduce related disputes, such as, for example, what constitutes a negotiation, which were so common in the UCP 500 period.
Articles 7 (c) and 8 (c) shift the risk from the nominated bank to the issuing bank in the negotiation of a deferred payment credit where fraud is uncovered before maturity. The nominated bank is now automatically authorized to negotiate a deferred payment undertaking and the issuing bank is bound to reimburse the nominated negotiating bank. In some jurisdictions, the applicant may rely on the local court injunction to refuse to reimburse the issuing bank. Some banks are now trying to put a new term in their service contracts to make sure that the applicant must make such a reimbursement. Again, whether or not such a term will be effective under certain jurisdictions will only be known over time.
Sub-article 12 (b) is important and works hand-in-hand with sub-articles 7 (c) and 8 (c) to protect the interests of the nominated negotiating bank in case of fraud surfacing before maturity.
Articles 14 and 16 regarding determination of compliance and giving notice of refusal are more articulated and unequivocal as compared with similar provisions in UCP 500. My suggestion to add ‘in one single notice’ has now been adopted to reflect that notice of refusal cannot now be given by instalments, even within the same day.
Article 17 on original documents is now much clearer and the impact of the Glencore case of U.K. is eliminated completely.
As I say at the beginning of this article, no set of rules in this world is perfect. The UCP 600 is in essence a set of default rules. Article 1 of UCP 600 has clearly spelt out that parties may modify or delete some of the articles to suit their own specific needs. To avoid confusion and conflict, the eUCP and ISBP will be updated to match the new provisions of the UCP 600. The updated versions should be available before the effective date of the UCP 600, 1st of July 2007.

Mr. T. O. Lee FAE, MCIArb, MITD is a consultant, expert witness, trainer, and arbitrator specialized in resolving international trade disputes involving letters of credit, bills of lading, charter parties, Incoterms 2000, trade frauds, and China trade. He represents Canada in various ICC Commissions, such as Banking, Commercial Trade Practice, Electronic Commerce, Mediation, and Arbitration. He was appointed by ICC Paris in 2003 as a Member of the UCP 500 Revision (UCP 600) Consulting Group and is rated as one of the nine best letter of credit specialists in the world in a recent global survey by L/C Views of USA. He is a member of the United Nations International Multimodal Transport Association, Geneva; Accredited Arbitrator of the International Center for Letter of Credit Arbitration, USA; a Fellow and an Accredited Expert (Letter of Credit) of the Academy of Experts, Gray's Inn, England; and a columnist in ICC Documentary Credit Insight (1994-1999); 'Maritime Asia/Intermodal Asia' by Lloyd's of London Press, and 'Hong Kong Economic Journal.' He works closely with the ICC Commercial Crime Bureau on commercial frauds involving bills of lading, air waybills, and letters of credit. He also provides training for the carriers, freight forwarders, bankers, traders, insurers, and lawyers on these subjects. Articles on bills of lading, letters of credit, CDCS exercises, highlights of dispute cases resolved, and training programmes can be found in his website http://www.tolee.com.

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