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									                                                                              LOUISE MERRETT
                                                                             TRINITY COLLEGE

                      COMMERCIAL LAW LECTURES 2011-2012

                      INTERNATIONAL SALES
 THE FINANCING OF INTERNATIONAL TRADE : BANKER’S COMMERCIAL
                            CREDITS

                                      THE UCP RULES


1.    Virtually all banker’s credits are today granted on terms that they are to be governed by
      the Uniform Customs and Practice for Documentary Credits (UCP), prepared by the
      International Chamber of Commerce.


2.    The rules provide a standard code and have to be incorporated into the contract to be
      binding: but now even if not express will probably be incorporated through almost
      universal practice unless expressly excluded.


3.    In some respects the rules simply confirm general principles eg. that “credits by their
      nature are separate transactions from the sales or other contract(s) on which they may
      be based and the banks are in no way concerned with or bound by such contracts”
      (Article 3 UCP 500 now Article 4 UCP 600). But they also set out some detailed rules
      not all of which are relevant for this course.


4.    The version of the rules referred to in some of the textbooks (eg Goode) are the UCP
      500 published in 1993. In June 2007 the ICC published the UCP 600 and these are the
      rules currently in force. The main purpose of the revision was to remove ambiguities
      and generally streamline the rules, while resolving specific problems.         There are
      therefore less articles overall (39 as opposed to 49 in the UCP 500) and new articles
      covering definitions and interpretation (Article 3). The most important provisions are
      outlined below and where relevant any changes introduced by the UCP 600 are noted.


Irrevocable Credits


5.    Under the UCP 500 credits were presumed to be irrevocable unless expressed to be
      otherwise. The possibility of revocable credits has now been removed: the UCP 600
      envisages all credits as irrevocable. Article 2 defines a credit as:




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       ‘…any arrangement, however named or described, that is irrevocable and thereby
       constitutes a definite undertaking of the issuing bank to honour a complying
       presentation.’


6.    Article 3 (which is the new article covering interpretation) confirms the old
      presumption has been replaced with a mandatory rule:


       ‘a credit is irrevocable even if there is no indication to that effect.’


7.    Article 10(a) removes any residual doubt by providing that that a credit can only be
      cancelled with the agreement of the beneficiary.


8.    Therefore in order to agree a revocable credit, the parties will have to contract out of
      the UCP 600 altogether.


Strict compliance


9.    Bankers have recognized the need for a more commercial approach for some time and
      this has lead the ICC to promote a more flexible approach to documentary compliance.
      The strict compliance rule is thus modified by a functional standard of document
      verification enshrined in UCP 500 article 13(a) which provides : “compliance of the
      stipulated documents on their face with the terms and conditions of the credit, shall be
      determined by international banking practice as reflected in these Articles.” (now UCP
      600 Rule 14).


10.   Compliance must therefore be tested according to the standard of what is necessary to
      allow the letter of credit to function as a payment instrument. The real difficulty is to
      identify the practices that reflect agreed international standards.         The ICC has
      produced a document attempting to identify some of these practices (ISPB
      International Standard Banking Practice for the Examination of Documents under
      Documentary Letters of Credit Jan 2003 – a revised form accompanied UCP 600).
      That provides, for example, in Article 37 that the description of the goods in the
      commercial invoice must correspond with the description in the credit. In all other
      documents the goods may be described in general terms not inconsistent with the
      description in the credit. But it is far from comprehensive.




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11.   The UCP rules themselves also contain some rules governing certain particular types of
      discrepancy.


12.   Art 34 of the UCP 500 permitted a tolerance of 5% more or less, than the contract
      quantity unless the credit stipulates to the contrary (extended to 10% if the quantity is
      qualified by words such as about or circa). This is confirmed and repeated in UCP 600
      Article 30.


13.   The latest rules (UCP 600) also contain a number of new provisions designed to ensure
      that documents are not rejected for overly technical reasons. For example, UCP 14(d)
      provides that data need not be identical in each document provided it does not conflict
      ie. Not a mirror image but not inconsistent. As to the description of goods, Art 18*c)
      provides that the description of goods in the Commercial Invoice must correspond with
      the description in the credit but that in all other documents the goods may be described
      in general (but not inconsistent) terms.


14.   There is also a new rule in the UCP 600 Article 14(j) that the address and contact
      details on the credit and documents need not correspond, provided both addresses are in
      the same country.


Time for response


15.   It is estimated that 60-70% of documents do not comply. This is why a strict mirror
      image approach is unworkable. In practice the documents are often returned and
      remedied by the seller and then represented. The seller usually has time to do this
      because the bank must specify all discrepancies in a notice of rejection which must be
      given without delay (and in any event within 7 days under UCP 500 art 14(d)(i) and
      (ii)). There is a further duty to act in accordance with that notice and return documents
      themselves within a reasonable time: Fortis Bank v Indian Overseas Bank [2010]
      EWHC 84.


16.   In the UCP 600 the rule that banks had to reject a tender within a reasonable time and
      in no more than 7 days has been overhauled. The reasonable time aspect was regarded
      as too uncertain, and so there is now a 5 day maximum limit without any requirement
      of reasonableness.




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17.   The rationale for the change is that, in practice, banks were tending to take 7 days in
      any event; the quid pro quo for accepting a shorter maximum period is that they can
      choose to take the full 5 days without fear of being accused of ‘unreasonableness’.




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