Towards UCP 900?
The quote at the outset from Santayana’s philosophical writings is particularly apt when 1.21 considering the future of the UCP regime, given that there have been a number of successes and failures during its evolution.
Learning the lessons from those previous experiences holds the key to producing a successful new UCP revision. That moment may, however, be some time away. On 6 October 2016, the ICC Banking Commission issued an initial communication setting out its position that ‘there is insufficient justification for the significant time and cost of a revision [to the UCP 600]’[107] In that regard, the ICC Banking Commission made clear that a revision would only be possible when it had been ‘clearly demonstrated that the existing UCP is no longer benefitting the trade finance commu- nity’[108] Whilst the Commission indicated that ‘50% of the problems [with letters of credit] apply to the presented documents’, particularly the transport documents, it saw the solution to this problem in ‘a greater understanding of ISBP 745’[109] As regards the other 50% of problems, the Commission considered it difficult ‘to see how a revision of UCP would make much of a material difference’.[110] Despite its initially negative assessment, the ICC Banking Commission invited ICC national committees to indicate whether they disagreed with that view and, if so, to send ‘a detailed business case and rationale that supports consideration of a revision’.[111] In this regard, two meetings were held with ICC national committee representatives in Rome on 8 November 2016 and Paris on 23 November 2016. Despite some counterviews, those meetings generally indicated support for the ICC Banking Commission’s initial position. Accordingly, the ICC Banking Commission confirmed its initial view in a communique on 19 December 2016 and again at the Banking Commission Annual Meeting in Jakarta on 6 April 2017. This process concluded with a formal decision issued by the ICC Banking Commission on 15 June 2017, which stated:The overwhelming response revealed that a revision of UCP 600 was not required. The prime objective of a revision is to address developments in the banking, transport and insurance industries. Significant feedback evidenced that any problems lay not with the rules themselves, but with the application, i.e. practice (‘international standard banking practice’) of the rules. An analysis of the revision explanatory notes (which covered over 70 issues including comments received from National Committees) did not provide a compelling enough rational, nor sufficient support, to justify a revision of UCP 600 at this stage.
1.22 Whilst it is clear from this decision that a new UCP is not at present imminent, the concluding three words suggest that the ICC Banking Commission has not entirely ruled out a new revision at some point in the future. If such a revision were ever promulgated, it is unlikely to follow the current sequence of UCP 400, UCP 500, and UCP 600 by being termed the UCP 700; the ICC’s publications have already passed this number (such as the ISBP 745), so that any revision is likely to be termed the ‘UCP 900’ or later. This in itself may be a point of confusion for the trade finance industry. Putting that issue aside, the possibility of UCP 900 raises two issues: namely should there be a revision (the procedural question) and, if so, what should it look like (the substantive question).
A. The Procedural Question
1.23 As regards the procedural question, the question posed by the ICC is whether there is a ‘business case’ for a further revision. On the cost side, most letters of credit are issued, advised and amended on SWIFT formats, which will be difficult, time-consuming, and expensive to change.
Furthermore, the ICC has envisaged a lengthy and costly process to produce any new revision.[112] Moreover, it will not only be the ICC and SWIFT involved in expense, but banks, traders, and all those involved in letter of credit transactions will also have to change their operations to respond to any further UCP revision. Accordingly, the collective costs are high.1.24 The better view is that these costs are unlikely to justify the limited benefits of any revision. For example, the transport provisions of the UCP 400 were revised in the UCP 500 and 600 in order to make their presentation and examination under letters of credit more efficient
and straightforward. Unfortunately, as indicated above, there has been no real change in the number of discrepancies related to the transport documents under letters of credit. This is unsurprising given that the position under the UCP 400 was more straightforward: if a bank was unable to determine the precise nature of the transport document presented under a letter of credit, the UCP 400 nevertheless contained minimum criteria that a bank could apply to determine whether or not to accept the document as compliant.[113] This commonsense position was altered under the UCP 600, with banks needing now to determine whether the transport document qualifies as an ocean bill of lading, a charterparty bill of lading, or some other type of document. As there was no residual category of transport document in the UCP 500 or 600, a bank that was unable to classify the particular transport document was left with little option but to reject the whole presentation. There was little principled basis or justification for altering the UCP 400 in this regard and the minimal (if any) practical benefits of the alteration did not justify the costs associated with revising the UCP regime. This is not a solitary example.
1.25
Ultimately, if there is no sound business case for revising the UCP 600, then there may be a more cost-effective way of achieving the functionally equivalent result to a full revision, namely by developing standard-form documentation for letters of credit and the documents to be presented thereunder.
Whilst a degree of standardisation has already been achieved for the letter of credit itself through the development of SWIFT formats, this is less true of letter of credit documentation. Such standard-form documents have already been developed under the equivalent rules for standby letters of credit, namely the International Standby Practices 1998 (‘ISP98’),[114] and there is no reason why greater standardisation might not be attempted in the letter of credit context. Moreover, such an approach could lead to the development of a simplified form of letter of credit, which requires the beneficiary to provide the nominated bank with a single document containing all the data relevant to the underlying sale and a certification or undertaking from the beneficiary that the goods have been shipped and the relevant documents sent directly to the issuing bank. Provided the certificate contains all the information required from the beneficiary, the nominated bank can pay safely and seek reimbursement from the issuing bank. In effect, the letter of credit would operate as a paper-based BPO and, if electronic presentation of such a document were permitted, the letter of credit would be indistinguishable from the BPO. Indeed, by amalgamating the letter of credit and BPO, this may pave the way for saving both by making the new hybrid instrument more attractive to beneficiaries. That said, there is no escaping the fact that, by allowing the beneficiary to present a simple pro forma certificate (in a manner similar to on-demand undertakings), the risks associated with letters of credits for issuing banks would increase. Whilst an issuing bank would always be entitled to recover the funds from the beneficiary on restitutionary or tortious grounds should the beneficiary’s certificate prove false (because, for example, the documents were never forwarded to the issuing bank), if beneficiaries are unwilling to pay the higher fees associated with riskier products and banks are unwilling to issue riskier letters of credit for capital adequacy reasons, then this proposal may ultimately struggle to gain traction. The longer term costs for banks may, however, be far greater if the letter of credit as an institution ultimately founders.B. 'The Substantive Question
1.26 As regards the substantive question, assuming that the ICC chose to develop the UCP 900, a revision would be timely, as there are a number of changes that the UCP 600 requires. First, to avoid the future risk of inconsistency, the guidelines on what counts as ‘international standard banking practice' for document-checkers should be merged into the text of the UCP 900. This would strengthen the role played by ‘international standard banking practice'; would clarify that practice and make it more accessible to non- bankers; and permit the UCP 900 to focus on letter of credit practice, rather than letter of credit law, as the latter is properly the domain ofjudicial and arbitral bodies.
1.27 Secondly, the requirement in UCP 600 that the presented documents must ‘not conflict with' should be clarified, so that banks and other parties understand the relevant standard of documentary compliance that they have to meet. In this regard, the UCP 600 appears to establish a higher standard before documents can be rejected than existed under the equivalent UCP 500 provision, which required that the documents not ‘appear on their face to be inconsistent with one another';[115] yet the number of discrepancies and rejections has not been dramatically affected by that change. As indicated above, this problem is exacerbated by the ISBP 745 being drafted in inconsistent terms. This confusion is part of a larger debate concerning the appropriate standard for documentary compliance and whether banks and courts should insist upon strict compliance,[116] commonsense compliance,[117] or some other more liberal standard. Without resolution of this fundamental issue, rejection rates under UCP 900 are unlikely to fall.
1.28 Thirdly, the UCP 600's provisions on transport documents are simply too complicated and represent the primary reason for the continued high rejection rates.[118] For example, the UCP 600 places significant emphasis on the on-board notation appearing on ocean bills of lading in determining the document's date of issue;[119] yet the ISBP 745 highlights the complexity of the issue and raises the question of whether a bill of lading issued on the same date as the onboard notation, but without an issue date, may nevertheless be treated as non- compliant under the UCP 600.
Similarly, whilst the buyer will undoubtedly need to clear the goods through customs, so that timely arrival of the documents will be commercially necessary in order to avoid charges, the ICC Banking Commission has never explained the justification behind the requirement that the original transport document be presentedwithin twenty-one calendar days of shipment[120] given modern, efficient forms of communication; yet this unnecessary twenty-one-day requirement remains a trap for the unwary, especially as this time frame could be further curtailed by the credit's expiration.[121] A more straightforward solution would simply be to let the parties to the sale transaction negotiate their own time frames (whether seven or fourteen days) without the UCP regime having to become involved at all. In light of these and other issues, the transport provisions in the UCP 600 would require drastic simplification in any new revision. The UCP 900 should, like the UCP 400,[122] contain a common set of core requirements relating to transport that must be set out by the beneficiary in a pro forma document to qualify as a valid presentation to a nominated bank, whilst the transport document itself is sent directly to the issuing bank. Those criteria might include the need for a signature, the dates of the relevant carriage, the points between which carriage is to occur, and the identity of the carrier and vessel. Such transport neutrality would obviate the need for the nominated bank to distinguish between different types of transportation, each with their own unique requirements. Potentially the rate of discrepancies would fall if the bank only needed to check the pro forma document's contents. Whilst this would have the downside for the nominated bank of not having any security over the underlying goods, it is unclear how significant this loss would be in practice when it has a right of reimbursement against a well-capitalised bank. The issuing bank's rights as pledgee need not be impacted, however, if the documents are sent straight to that bank.
1.29
Fourthly, the possibility of presenting a draft or bill of exchange under a letter of credit has been a source of some confusion, since it is not a document that the applicant relies upon for completion of the sale contract, but instead simply represents part of the process whereby the bank's obligations can be placed in a form that facilitates transfer to third parties. If the letter of credit does not stipulate for a draft, the UCP 600 requires the bank to ignore the document.[123] The applicant should, therefore, follow suit. The reality is that applicants frequently invoke discrepancies in the draft, or are asked to waive such discrepancies, despite the document's obvious lack of utility to the applicant; and banks frequently reject presentations on the basis that the draft has not been properly indorsed. Conversely, even where a letter of credit does require the presentation of a draft, the English courts have been prepared to read down that stipulation on the basis that the draft simply concerns the means by which the bank performs its undertaking.[124] Accordingly, to resolve this difficulty, the UCP 900 should reduce the four types of letter of credit under the UCP 600, namely letters of credit ‘available by sight, deferred payment, acceptance or negotiation’,[125] to just two: payment by sight of conforming documents or payment on a deferred basis. This would reduce the complexity of the UCP 900 by breaking the historical link between letters of credit and bills of exchange. Indeed, given that drafts may attract stamp duty and that domestic laws regulating bills of exchange are perceived as complex,[126] the number of letters of credit involving drafts has already seriously declined. Whilst drafts can admittedly still perform an important function for the seller/beneficiary in managing its cash flow, the availability of other SCF techniques (as well as the possibility of a transferable letter of credit) means that the beneficiary would not be left without options if drafts were to disappear from the letter of credit landscape.
1.30 Fifthly, there has been almost perpetual confusion over the concept of ‘negotiation’. Such was the issue under the UCP 500 that the ICC issued a separate position paper on the point, since ‘a number of banks fail to understand the meaning of the term “negotiation” in connection with the availability of a documentary credit’[127] Despite this being a major aspect of the UCP 600’s revision, the position has improved little given that negotiability is a concept steeped in the history of the bill of exchange. If, as suggested above, the UCP 900 reduced the types of credit available (to sight and deferred payment credits only), the concept of ‘negotiation’ could be excised from the UCP’s text altogether.
1.31 Sixthly, letters of credit often stipulate for the presentation of documents bearing the number associated with the letter of credit, as well as the original letter of credit itself, yet neither the UCP 600 nor the ISBP 745 contains any provision dealing with such stipulations. Nevertheless, the failure to comply with such requirements has been a source of many alleged discrepancies, despite the fact that this requirement is generally for the purpose of the bank’s own internal housekeeping. As such a stipulation has little to do with the credit’s operation, it should be abandoned as a basis for rejecting presented documents.
1.32 Seventhly, the UCP 600 contains a force majeure clause that is likely to be given legal effect by national courts.[128] The significance of such a provision is self-evident during a global pandemic that has shut down supply chains.[129] Such a clause is, however, hardly likely to inspire confidence in the letter of credit as an institution, given that the provision covers a wide variety of potentially frustrating events, including ‘any other cases beyond [the bank’s] control’, and potentially terminates entirely (rather than simply suspends) the banks’ obligations to pay if the credit expires whilst the frustrating event is still extant. Such a provision should be removed entirely, with the matter being left to the relevant contract’s applicable law, or significantly softened to become more beneficiary-friendly. Indeed, given the absence of any choice of law rule in the UCP 600 (and the fact that letters of credit rarely contain a choice of law), it is odd that the UCP seeks to deal with such an overtly legal issue when the impact of frustration or force majeure on the banks’ undertakings will depend so heavily on the approach taken by the particular applicable law. If the force majeure provision is to be retained, it should at least be redrafted to deal with the problem of sanctions, which was considered above.
legislation before electronic presentation is permitted (see, for example, UK Bills of Exchange Act 1882, ss 89A-F); and the fact that a bill of exchange may be invalidated by formal defects (as in China).
Eighthly, the inter-relationship between a letter of credit's transfer and its assignment is a 1.33 source of confusion. In particular, the UCP 600 makes clear that an assignment of proceeds is permissible (provided that it is valid by reference to its applicable law), but that ‘the assignment of the right to perform under the credit' is not.[130] Not only is it often difficult, as a matter of interpretation, to determine whether a particular assignment concerns the right to performance or the fruits of performance, but the validity of non-assignment clauses in domestic law is fraught with difficulty.[131] Accordingly, it would be preferable if the UCP 900 dealt solely with the procedures for transferable credits, omitting issues relating to assignment altogether. Indeed, as with the case offorce majeure, it is surprising that the UCP attempts to deal with such questions at all, given that an assignment's validity will depend so heavily on the relevant applicable law.
Ninthly, rather than electronic presentation being covered by a distinct set of principles as 1.34 a mere adjunct to the UCP 600,[132] such issues should be placed up-front and centre in the text of the UCP 900 itself. Whilst this change may appear cosmetic, when compared to what currently exists under the UCP 600 and e-UCP, it would send the strong message that the ICC is serious about adapting the UCP regime to e-commerce.
Finally, when drafting the UCP 900 greater thought should be given to whether the text 1.35 should continue to govern default payment undertakings, such as standby letters of credit, given that there are separate principles and rules available for such instruments.[133] Once standby credits are removed from the UCP regime's scope, the UCP 900 would have to address more explicitly the inter-relationship with other international instruments (such as ISP98) and domestic legislation (notably Article 5 of the Uniform Commercial Code).
V.