Salient Features of the Legal Framework for the BPO
13.11 The legal framework for BPOs largely follows the principles governing documentary credits as encapsulated in the UCP.
In the absence of decided court cases on the BPO, therefore, analogies with the law documentary credits are most pertinent.A. Applicable Rules and Notable Exclusions
13.12 The structure and terminology of the URBPO relate back to familiar language used in the UCP and adapt it for digital communication. The application of the URBPO, therefore, like the UCP, is predicated upon the agreement of the parties. So, the URBPO only apply when the payment segment of an established baseline expressly states that it is subject to the Rules or when each involved bank agrees in a separate agreement that the Rules apply to the BPO.[1267] When the URBPO are incorporated in the established baseline, the Rules apply in their entirety and bind the banks. However, it is still open to the banks to expressly modify or exclude some specifically agreed rules through the established baseline or by separate agreement.[1268] There is no precedent for the use of the BPO without incorporating the URBPO. In that event, the court would arguably apply general principles of law and thereby end up applying the URBPO as the most advanced and authoritative statement of the applicable industry standards.
13.13 By design, the URBPO do not include all the contractual relationships that one normally encounters in the practice of documentary credits, and some of these exclusions have inhibited the use and growth of the BPO instrument.
Since the URBPO only cover the bank- to-bank relations, or what is termed the ‘collaborative space' for banks, the relations between the seller or buyer and their respective banks, or what is termed the ‘competitive space' for banks is left to each individual bank. As seen above, however, the competitive space is covered by a set of guidelines to assist the banks in the creation of customer contracts or agreements.[1269] Secondly, since there is no prospect of presenting documents to the bank or the TMA, there are no rules for the presentation of documents in the URBPO, which contrasts with the extensive provisions concerning documents in the UCP.[1270] The URBPO also do not provide for the basis for determining whether the data matches or does not match to trigger the payment or rejection of a presentation. That role and what it entails, which are the equivalent to the determination of documentary compliance under documentary credits, are left to the TMA and its relations with the subscribing banks.[1271] Similarly, since the BPO is the obligor bank's direct undertaking to the recipient bank, there are no provisions in the Rules for advice or confirmation of the undertaking.B. Establishment of the BPO and Amendment of an Established Baseline to Add a BPO
13.14
As a payment method, the BPO, just like the documentary credit, will be agreed upon in the trade transaction and its terms and conditions will be communicated to and among the banks at the outset. It would then be part of the established baseline and would give the buyer and the seller the whole range of financing options along the different segments of the trade transaction; for instance, pre-shipment, post-shipment, approved trade receivables, and buyer finance. Furthermore, the BPO can be issued by amendment to the established baseline later in the lifecycle of the trade transaction and for an amount that differs from the value of the goods since some of the services relating to the goods would have been performed earlier in the cycle.
It would then provide post-shipment financing based on the re- ceivables.[1272] This flexibility is useful where the seller identifies a financing requirement based on receivables that will not provide liquid funds for a while, and yet the commercial and transport data had been submitted to its bank. A delay in issuing the BPO also reduces the cost of capital for the buyer whose credit lines remain free until the BPO is issued.[1273]13.15
According to the URBPO, a baseline incorporating the BPO only becomes an established baseline, ie effective, when each bank has accepted its role through the TMA. When there is only one obligor bank that submitted a baseline to the TMA and there are zero mismatches between that baseline and the baseline submitted by the recipient bank, the BPO will become established when the TMA sends a baseline match report with zero mismatches with the status ‘established' and affirming a match between the data submitted by the two banks.[1274] At that point, the obligor bank is irrevocably bound by the BPO. If there are other obligor banks, for instance when the obligor bank is not the buyer's bank or there are multiple obligor banks, the BPO is established when the TMA sends to each bank a role and baseline acceptance notification following a baseline match report with zero mismatches.[1275] Similarly, any amendment either to the established baseline that incorporates the BPO or to incorporate the BPO requires the consent of each involved bank.size=1 color=black face="Times New Roman">[1276] The amendment is entirely an inter-bank matter and may be requested by the obligor bank or the recipient bank by sending a baseline amendment request to the TMA and it is accepted by the counterparty bank sending an amendment acceptance to the TMA.[1277] The amendment becomes effective when the TMA sends to the obligor bank an amendment acceptance notification following such acceptance or when the TMA sends to any other involved bank a role and baseline acceptance notification confirming that such bank has accepted its role as specified in the baseline contained in the full push through report.[1278] According to the URBPO, a requested amendment will be rejected and the established baseline will remain in place if any involved bank rejects the amendment request.
If this happens, the TMA sends an amendment rejection or a role and baseline rejection to each other involved bank.[1279]C. Expiry Date
13.16 An established baseline must state an expiry date for the BPO; that is, the date by which all the data sets must be submitted to the TMA. The BPO remains in effect until it either expires before submission of all the data sets required by the established baseline, the established baseline is amended so as to release the obligor bank from its undertaking, or the BPO is fully paid in accordance with its terms, whichever happens earliest.[1280] The URBPO eschews the problem of different time zones across the globe by standardising the determination of the expiry date. It does this by adopting the Universal Time Coordinated (‘UTC’) as the basis for computing the time of the expiry date.[1281] Under this approach, all expiry periods are specified using the same time reference, the UTC, which approximates the Greenwich Meridian Time.[1282]
D. Honour of the Undertaking
13.17 The undertaking of the obligor bank in the BPO is to pay at sight or incur a deferred payment undertaking and pay it at maturity in accordance with the terms of the BPO and following the submission of the required data sets and a data match or a data mismatch that has been accepted by each involved bank.[1283] Thus, the pre-requisite for triggering payment under a BPO is that there is a data match on the TMA or a mismatch that has been accepted following the submission of the data by the recipient bank.
In a departure from the UCP which anticipates that the nominated bank will examine the required set of documents as soon as it is presented,[1284] the URBPO requires the submission of all data sets to the TMA before a data match is made. When the match is made, the TMA sends a data set match report simultaneously to all the involved banks of either a data match or data mismatch.[1285] In case of a data mismatch, the obligor bank has an immediate discretion to accept or reject the mismatches.[1286] This differs significantly from the process in documentary credits where the nominated bank has, first, to use its j udgment to determine compliance with the terms of the credit; and if the documents do not comply, secondly, to decide whether or not to contact the buyer to seek a waiver of discrepancy.[1287] Thus, the procedure under the BPO is rigorous, efficient, and objective, and indeed, a major attraction of the BPO is that it releases banks from the cumbersome processes of document examination and exercising discretions on honour and payment. In practice, though, waivers of mismatches in BPOs are requested and often granted because of the relationships among the contracting parties.[1288]name=bookmark1426>E. Duties of the Bank
An involved bank is required to act on the messages received from the TMA without delay. 13.18 It must also ensure that any data it submits to the TMA relating to the underlying transaction accurately reflects the data received from the buyer or seller in the underlying transaction.[1289] When a message is received during the time when a bank is normally closed, the message will be deemed to have been received on the next banking day.
F. The Independence Principle: Separate and Independent Contracts
Article 6 of the URBPO provides for the independence or autonomy of the BPO from the 13.19 underlying and related transactions thus:
Article 6 Bank Payment Obligations v. Contracts
(a) A BPO is separate and independent from the sale or other contract on which the underlying trade transaction may be based.
An Involved Bank is in no way concerned with or bound by such contract, even if any reference whatsoever to it is included in an Established Baseline. Consequently, the undertaking of an Obligor Bank is not sub- j ect to claims or defences by the buyer resulting from its relationship with an Involved Bank or the seller.(b) A Recipient Bank can in no case avail itself of the contractual relationship existing between the buyer and the Buyer's Bank or an Obligor Bank other than the Buyer's Bank.[1290]
This principle imposes a singular duty on the obligor bank to pay under the BPO if there is a 13.20 data match or a mismatch that has been accepted. The independence principle is reinforced in article 10e of the URBPO which provides that the obligor bank's duties do not depend on its right or ability to obtain reimbursement from any other party. The above provisions are similar to those that apply to documentary credits, on which there is a body of well- developed literature, together with a growing number of exceptions to that principle, the most known of which is the fraud exception.[1291]
13.21 A pertinent issue is, therefore, whether the fraud exception to the independence principle in documentary credits similarly applies to the BPO.[1292] It ought to be recalled that the fraud exception in documentary credits is a creature of domestic law because the ICC deliberately left it to each jurisdiction to develop that exception according to its local circumstances.[1293] In Anglo- American jurisdictions, the fraud exception is principally based on the overriding public policy of ex turpi causa non oritur actio, or, ‘fraud unravels all', which applies as a general principle of law.[1294] The same is true for the widely acknowledged illegality exception,[1295] which is not specific to documentary credits but, rather, applies as a general principle of law, that the courts of law will not be used to perpetuate an illegal purpose or transaction.[1296] In principle, therefore, the fraud exception applies to BPOs, as does the illegality exception and other private law[1297] or public law principles which might affect the application of the autonomy principle, such as sanctions, anti-corruption measures, price escalation clauses, or Islamic law compliance is- sues.[1298] The courts are likely to reason by analogy to documentary credits, applying specific legislation where it exists, for example in China,[1299] or case law where it is relevant.
13.22 The digital element of the BPO is a double-edged sword as far as the fraud exception is concerned. While the electronic transmission of information to the banks isolates the banks further from the underlying transaction, making it even harder for the them even to suspect fraud in the underlying transaction or the documents,[1300] certain types of fraud, for example a collusion between the buyer and seller, are easier to perpetrate when the electronic transmission is limited to trade data. Notwithstanding these practical nuances, the application of many of the exceptions to the autonomy principle is a matter of public policy and would, therefore, apply to the BPO.
G. Data Supremacy in a Digital Bank-to-Bank Instrument
Since the BPO is a digital instrument, the undertaking of the obligor bank to the recipient 13.23
bank is conditional on the matching of data sets required by an established baseline on the TMA.[1301] While there would usually be an underlying trade transaction that generated the documents between seller and buyer, the BPO itself as a bank obligation towards another bank and the information flow among the banks and the TMA are exclusively digital. Thus, article 7 of the URBPO provides that:
Article 7 Data v. Documents, Goods, Services or Performance
An Involved Bank deals with data and not with documents, or the goods, services or performance to which the data or documents may relate.[1302]
The digital nature of the BPO is the cornerstone to its efficiency and cost-effectiveness. 13.24 It, however, raises several concerns that have thwarted the widespread acceptance of the BPO.[1303] First, the isolation of banks from the underlying transaction limits their compliance with their internal procedures on checking the genuineness of the transaction and complying with the law on know-your-customer requirements.[1304] While the banks involved in documentary credits rely on the documents relating to the underlying transaction to check the genuineness of that transaction, the relevant documents are not routed through the banks in the BPO arrangement, thus depriving the banks of this avenue for playing their oversight function and complying with the law. Secondly, and related to this, the trade documents in a documentary credit transaction, such as the bill of lading, constitute the collateral for bank financing and a potential source of reimbursement or loss mitigation for the bank. Their absence in the BPO transaction deprives the banks of this type of security and risk-mitigation technique.[1305] Thirdly, the digital nature of the BPO technically increases the potential for the perpetration of some types of fraud; for example, where the parties to the underlying transaction collude to present false data to their respective banks.
This contrasts with documentary credits which typically require a set of different types of documents generated by different unrelated parties, thus embedding some basic protections against fraud by the parties to the underlying transaction.[1306] Together with some legal and deliberate choices made by the banks, these reasons have constrained the wide acceptance of the BPO by the banks.
H. The Boilerplate Provisions
13.25 The URBPO contain the standard disclaimer clauses that the involved bank will not be liable or responsible for the effectiveness of the data received from the seller or buyer or any documents or acts by a third party (article 12); for force majeure acts—those beyond its control (article 13); and the unavailability of the transaction matching application (article 14). By way of limiting the application of the force majeure event, the obligor bank is required to pay on the resumption of business and the recipient bank is entitled to payment if the BPO expired during the force majeure event and all the data sets required by the established baseline had been submitted before the force majeure event.[1307]
I. Assignment of Proceeds (Article 16)
13.26 The recipient bank is permitted to assign the proceeds of the BPO, in similar fashion to the assignment of proceeds under the article 39 of the UCP. There is, however, a logical difference with the provisions of the UCP where the beneficiary is typically the seller of goods or services. Thus, the URBPO require the recipient bank to obtain consent of the obligor bank for an effective assignment of proceeds.[1308] Reasoning by analogy to the requirement for consent for the transfer of a documentary credit, it would seem that express consent to transfer a BPO must be obtained.[1309] Similarly, it would also be expected that such consent would be readily forthcoming in most cases when it is requested because consent should not be withheld unless there is a good reason.[1310]
J. Applicable Law
13.27 Article 15a of the URBPO provides that the governing law of a BPO will be that of the location of the branch or office of the obligor bank. According to article 15b, the preceding provisions in the URBPO supplement the applicable law to the extent not prohibited by that law. These unsurprising provisions provide clarity from the outset while concealing the trap created by the fact that many countries do not have mature laws or a wide experience on BPOs or electronic transactions. It would be expected that recourse would be had to the law of documentary credits, but still, this is underdeveloped in certain crucial respects, such as the application of the fraud exception; so, this means that the law applicable to the BPO may be uncertain.[1311] Ultimately, the URBPO might apply to any gaps in the law since it is the most developed legal instrument on BPOs and because it would not be prohibited by law.
IV.