What the UCP does not tell you about documentary credits

by Rupnarayan Bose[1]

For more than 86 years, the Uniform Customs and Practice for Documentary Credits (UCP) – created by the International Chamber of Commerce, Paris (ICC) – has served as the backbone to the documentary credit operations worldwide. Therefore, it is not an exaggeration when the ICC claims that, “…the (UCP) are the most successful private rules for trade ever developed. ….[A]ll (those) who deal with letter of credit transactions worldwide will refer to UCP 600 on a daily basis.”

The ICC is quite correct in asserting that the UCP is the first stop in one’s endeavour to gain expertise in documentary credit operations. What the ICC does not say is that reference only to the UCP is not enough. The UCP leaves several themes underplayed or unsaid. There are gaps in the rules which are allowed to go by default, issues that the UCP ought to have addressed but did not, rules which find merely a passing mention in the UCP but are dealt with exhaustively elsewhere. One must search high and low for those precious bits of information that makes one’s efforts more meaningful. But then, one has to know what questions to ask, what to look for and where. One has to know what is missing that’s important to one’s learning process. These pieces of information – extremely valuable and relevant – pop up like bubbles on various forums or group chat platforms. Like bubbles, they disappear immediately thereafter, unless one is alert enough to save the information for future reference, or pursue these stray bits to their logical conclusion – enriching one in the process.

As things stand today, the UCP is yet to be fully internalised or understood as it should have been at the operating level by the bankers and other stakeholders. For those who are committed to the challenging world of documentary credits, the missing links that I refer to make their objectives even more difficult to attain. Without much ado let me cite a few examples to underscore what I mean.

The ICC would like to tell you that a payment letter of credit (LC available by payment) and a negotiation letter of credit (LC available by negotiation) are two different instruments. How so? You will find their definitions neither in the UCP nor in ISBP 745 (International Standard Banking Practice for the Examination of Documents under UCP 600). The difference between the two types of credits is explained (as far as I could tell) in ICC Banking Commission Opinion TA 569, and on page 22 of the Commentary on UCP600 published by the ICC Banking Commission. Actually, there does not appear to be any fundamental difference in the form or structure of these apparently two different types of LCs. The difference lies only in the manner of claiming reimbursement by the nominated banks. It’s no wonder that at the ground level the difference is given a go-bye.

Questions arise. Even if one happens to chance across these terms, who would know where to look for more information on the subject? Where does one look for their definitions? Are these references easily accessible to you and me? Related questions: What purpose do they serve; is it really necessary to continue with these definitions or differences?

Let us take up another example.

Article 6(b) of UCP 600 says, “A credit must state whether it is available by sight payment, deferred payment, acceptance or negotiation.” The definitions of these types of credits, and the features that distinguish them, are not available in article 2 or in the ISBP. Cry as you might, no clarification is available anywhere in the usual places. But do not lose heart. “Seek and thy shall find”, as the saying goes. The differences are available – explained very lucidly in the ‘Analysis’ to Case 15, Case Studies on Documentary Credits under UCP 400, ICC Publication no. 459. How the manner of drawing of drafts plays a role in defining these types of credits also figures in the ‘Analysis’, and is quite illuminating. I wonder why the UCP or the ISBP didn’t care to define the terms under sub-article 6(b). Do the definitions in Publication no. 459, published decades ago, still hold? I wish I knew the answer to that.

Let’s look for some more gems in this Aladdin’s cave.

Article 14(c) is about “[a] presentation including one or more original transport documents…”. This article is totally, absolutely silent about presentations that include only copies of transport documents, not their originals. Are there special rules for copies (of transport documents) too, except and beyond what’s available in article 14? Who would think of asking this question in the first place? Neither the word “original” in article 14(c) help to trigger an alert in our mind, nor does the UCP care to inform (warn?) us that there do exist separate rules for non-negotiable (copies of) transport documents – go look at section A(6) of the ISBP!

Incidentally, what are the rules for arriving at the maturity date for presentations that are initially deemed as non-complying? Sadly, it’s not the UCP that you should refer to for answers.

Next, try this: Article 38(k) states, “Presentation of documents by or on behalf of a second beneficiary must be made to the transferring bank.” What if someone tells you that exceptions to this “rule” are permitted under certain circumstances? Where would you look for guidance, clarification or further information? Any idea?

Let’s field one more curve ball: According to UCP 600 sub-article 9(b), the advice should accurately reflect the terms and conditions of the credit or amendment advised by the advising bank. The issue here is, while advising the credit is the advising bank allowed to add its own conditions (beyond those in the LC)? Would that attract the provisions of article 10 (Amendments)?

Rules or interpretations, it’s no use searching in the UCP for clues.

Under “Preliminary Considerations”, ISBP 745 states very clearly the purpose of its existance:

  • The practices described in this publication highlight how the articles of UCP 600 are to be interpreted and applied, to the extent that the terms and conditions of the credit, or any amendment thereto, do not expressly modify or exclude an applicable article in UCP 600. (Emphasis added)

The ISBP is supposed to only “interpret” the UCP rules, not lay down new ones. But, in my opinion, it does so. The ‘rules” applicable to copies of transport documents are available not in the UCP but under article A6, sub-articles A18(b)(i) and A18(c) of ISBP 745. These “rules” tell you the standards for examining copies, whether data-conflict norms apply to copies, if copies are subject to UCP article 14(c) or only 14(f), and the rules applicable to the presentation period.

While we are on UCP Article 14, let us look at yet another issue. Article 14(g) states, “A document presented but not required by the credit will be disregarded and may be returned to the presenter.” What if this document contains data that trigger the concept of “data-conflict”? Still “disregard” it and return to the presenter? What do the “rules” say?

A passing thought. There is inter-se confusion within the ISBP itself, not to speak of conflict between the UCP and the ISBP, as pointed out in my article “Non-documentary conditions and data conflict”[2]. I wonder if there would have been any scope for such confusion and conflict had all the rules on documentary credits been collated and brought under one roof, within the four walls of the UCP, and the UCP updated periodically.

UCP article 25 is about “Courier, Post Receipts or Certificate of Posting” and its specifications. But would the reader of the UCP ever come to know that these rules do not apply if these documents are used as “evidence of sending documents, notices and the like to a named or described entity”? True to style, “rules” do exist for the latter, but you would not find even a casual mention about them in the UCP. These rules appear by way of article A10 in the ISBP. If you are unfortunately focused only on the UCP for the rules related to documentary credits, that’s your problem, isn’t it?

I was fortunate to have been writing a new book on documentary credits. (It’s now complete. The earlier one was published way back in 2008). I was researching extensively for information that would serve as the point of reference for many of the observation that I included in the book, or for contexts to scenarios that appeared to me as incomplete. I hoarded information, little nuggets from all over the place. In the process I realised that my knowledge about documentary credits would never be anywhere near what I hoped it to be unless I went beyond the UCP and the ISBP. Extracts from the Opinion of the ICC Banking Commission – ”published”, “consolidated” and “unpublished” (yes, there are “unpublished” Opinions too!), DOCDEX Rules, ICC Guidance Paper on various issues, Commentary on UCP600 published by the ICC Banking Commission, UCP600: Analytical Commentary by Professor James E. Byrne et al, UN documents on transportation etc., articles by experts on documentary credits, everything that I came across during my research, bits and pieces shared from time to time by others, were added to my library. I have included every bit of useful information from these sources in my new book on letters of credit, so that one’s pursuit of knowledge is not hampered for lack of credible, relevant, authentic and complete information.

The major question that arises is about the dissemination of information across all levels of operation. If all the rules and the definitions on a particular subject are not available at one place, the journey of the likes of us turns into an obstacle race. It’s even more confusing when I am not sure whether, for example, an Opinion of the ICC Banking Commission expressed a few years ago (say, in the pre-UCP 600 era) is still valid today. Nevertheless, the question that I must go back to is, why should the rules on documentary credits spill over to the ISBP? Why, should the rules and explanations that are vital and pivotal to documentary credit operations be spread all over the place, frequently tucked away in various ICC publications, unseen by most, not available to anyone who is interested? Apart from the fact that the publications named earlier are mighty costly, how many know about them or be keen to make them available at the operating outlets for ready access – given that most do not even read the UCP or the Incoterms rules thoroughly?

Explanations, supported by examples, are welcome. In that respect the ISBP is a wonderful compilation and is a boon to many (who care to read it!). My only grouse is that the “rules” in the ISBP, the interpretations, definitions and critical information tucked away in the widely dispersed ICC Publications should be carefully curated periodically and brought within the fold of the UCP itself. As a book of rules, a serious attempt should be made to remove the crutches that the UCP still relies on for completeness. All the rules applicable to documentary credit operations, supplemented by definitions wherever necessary, should be brought under a single umbrella of the UCP, and updated periodically. Allow the UCP to be a document that is independent, complete by itself, and dynamic. Let the UCP stand firmly on its own feet.

30-July-2019


[1] Home page www.rnbose.com. For training requirements mail to rnbose@gmail.com.

[2] Published on 15 May 2019 in lcviews.com, http://www.lcviews.com/index.php?page_id=673

For more articles, click here: https://rnbose.com/2019/01/11/the-confusing-world-of-confirmed-credits/