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INRODUCTION TO UCP 600

An extract of the presentation made by Mr. Parama Dharmawardene


Management Consultant, Senior Vice President, Trade Finance Association of Bankers
on

Wednesday, 14 February 2007 at the Peoples Bank Auditorium


Organized by Trade Finance Association of Bankers, Sri Lanka

1. Background
UCP first came into operation in 1933 and UCP 500, the revision currently in force,
came into force with effect from 01 January 1994. In May 2003 ICC authorized the
ICC Commission on Banking Technique and Practice (Banking Commission) to begin
a revision of ICC. The Drafting Group considered a methodical survey of ICC Opinions
and DOCDEX decisions, the legal cases and the ICC rules since UCPSOO, URR525,
eUCP, ISBP for incorporation.

A study of ICC Opinions under UCP500 revealed that 17 articles had either none, one or two
opinions, 7 Articles in UCP accounted for over 58% of all Opinions rendered by the Banking
Commission. The 7 articles that required special attention were the following:
Art. 9. Liability of Issuing and Confirming Barks
Art. 13. Standard for Examination of Documents
Art. 14. Discrepant Documents and Notice
Art. 21. Unspecified Issuers or Contents of Documents
Art. 23. Marine/Ocean Bill of Lading
Art. 37. Commercial Invoices
Art. 48. Transferable Credit

2. The Revision Process


In addition to addressing the problems relating to these 7 articles the Group reviewed the
remaining 42 Articles in UCP 500 as well. They also looked at issues not specifically covered in
UCP 500 and the topics in winch there has been cause for banks, Companies, the shipping
industry or lawyers to write to the ICC for an opinion. And the areas where it is felt the UCP
could be more explicit or encompass additional conditions / criteria.

They wanted to avoid document checkers are being required to make judgement calls based
upon their own interpretation of the document rather than the support of a clear guideline as to
the correct position.

3. The Issues
ICC was of the view that the UCP should not be revised just because it has reached a ten year
cycle of usage. A revision should he made on the basis that a new text will enhance the letter of
credit product, and to enable practitioners to undertake transactions with a set of rules that will
be written more clearly (especially to those whose mother tongue is not English), encompass
current trends and issues and above all, remove the ambiguities that exist today

4. Objectives
The main objective of the revision was the reduction in unjustified discrepancies by banks by
ensuring transparency and clarity, facilitation of remedies to reduce queries, reduction of the
element of interpretation, limiting potential litigation, seeking to eradicate poor presentment by
beneficiaries and to have a clearer understanding of the principles of the UCP. They also wanted
to place the onus on the Issuer to be precise in LC terms

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This is the most comprehensive review in the history of UCP. While no draft will satisfy everyone,
the drafting committee gave everyone an opportunity to express their views. All suggestions
were considered, no matter how minor or small. Many UCP 500 articles have been moved or
merged with older articles, while others have been deleted. Decisions on the new draft, is taken
using a voting system by ICC ‘s National Committees.

5 The Structure of UCP600


The structure of the UCP600 is as follows:
Articles 1-5 : Framework of the UCP 600
Articles 6-10 : Structure of and obligations under documentary credits
Articles 11-18 : Pre-advice; Nomination; Reimbursement; Standard for examination of
documents; Discrepant documents, waiver and notice; Originals; Invoice
Articles 19-27 : Transport documents
Article 28 : Insurance documents
Articles 29-37 : Extension; Tolerance; Partial shipment; Instalments; Disclaimers; Force
Majeure
Articles 38-39 : Transferable credits; Assignment

6. Major changes
The following articles of UCP 500 are not reflected in UCP 600

Article 5 : Instructions to Issue / Amend Credits


Article 6 : (part) Revocable
Article 8 : Revocation
Article 12 : Incomplete or Unclear Instructions
Article 38 : Other Documents
Content of Articles 2, 6, 9, 10, 20, 21, 22, 30, 31, 33, 35, 36, 46, 47 moved or merged.

The following articles in UCP 600 are not reflected in UCP 500
Article 2 : Definitions
Article 3 : Interpretations
Article 9 : Advising of Credits, Amendments
Article 12 : Nomination
Article 15 : Complying Presentation
Article 17 : Original Documents and Copies

7. Key issues
7.1 Article 2 - Definitions
All definitions were brought under a single article and definitions were provided for the following,
which were absent in the UCP500: Advising Bank, Applicant. Banking day, Beneficiary, Complying
Presentation, Confirming Bank,

Honour, Issuing Bank, Negotiation (ICC Position Paper 2), Nominated Bank, Presentation,
Presenter. The two definitions found in UCP500, Credit ( UCP 500 Article 2) and Confirmation (
UCP 500 article 9b) were also moved here.

7.2 Article 3 - Interpretations


All sub articles in UCP500 relating to interpretation was brought under this article. They are:
Signed (UCP 500 sub-Article 20b), Legalised (UCP 500 sub-Article 20d), Branches (UCP 500
Article 2), First class (UCP 500 sub-Article 20a), Prompt (UCP 500 sub-Article 46b), On or about
(UCP 500 sub-Article 46c: now ‘calendar’ days), To, until (UCP 500 sub-Article 47a), From, after
(UCP 500 sub-Article 47b), First half second half (UCP 500 sub-Article 47c), Be-ginning, middle,
end (UCP 500 sub-Article 47d).

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Two new interpretations on
Singular / Plural and Irrevocable were also included.

7.3 Article 2 - Concept of Honour


Under article 2, ‘Honour’‘ was defined as:

§ to pay at sight if the credit is available by sight payment.


§ to incur a deferred payment undertaking and pay at maturity if the credit is available by
deferred payment.
§ to accept a bill of exchange ( “draft” , drawn by the beneficiary and pay at maturity if the
credit is available by acceptance.
All types placed under one concept ‘Honour’ to simplify the rules and avoid repetition throughout
UCP. Bank‘s obligation under an LC. Is the basic concept of an LC is an instrument of payment
and honour is the all-encompassing term for giving of value.

7.4 Article 2 - Negotiation


The term ‘Negotiation’ continues to be a contentious issue. What does negotiation mean?
Different interpretations exist all over the world and general agreement on the meaning has not
been forthcoming.
How can it be defined? /CC Position Paper No. 2:
… a number of banks fail to understand the meaning of the term ‘negotiation in connection with
the availability of a documentary credit. The term 'negotiation’ is defined in UCP 500 as ‘the
giving of value by the bank authorised to negotiate’ … the phrase ‘giving of value … may be
interpreted as either ‘making immediate payment’ or ‘undertaking an obligation to make
payment’

UCP 600 Article 2 Definition:


Negotiation means the purchase by the nominated bank of drafts (drawn on a bank other than
the nominated bank) and / or documents under a complying presentation, by advancing or
agreeing to advance funds to the beneficiary on or before the banking day on which
reimbursement is due to the nominated bank.

7.5 Parties or Banks


UCP 500 had no interpretation of bank. The previous draft revision read ‘The term bank includes
but is not limited to entities traditionally known as a bank or other financial institution’. However,
in the final draft revision this interpretation was removed. Since non-banks are already issuing
Documentary credits we have missed an opportunity to resolve the problem that the Banking
Commission will be faced with when a request for an opinion is submitted after
adoption/implementation of the new rules.

7.6 Articles 7c, 8c & 12 - Discount of Deferred Payment Undertaking

Nomination of a bank includes authorising a bank to prepay or purchase. This has also been
included in Article 7 Issuing Bank Undertaking and Article 8 Confirming Bank Undertaking. Article
12 states ‘By nominating a bank to accept a draft or incur a deferred payment undertaking, an
issuing bank authorizes that nominated bank to prepay or purchase a draft accepted or a
deferred payment undertaking incurred by that nominated bank’. There is a doubt as to whether
all issues have been incorporated and whether there will be a conflict with local laws of some
countries and who should be responsible for fraud?

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7.7 Article 14a - ‘On their face’
Reference to ‘On its Face’ has been deleted in all places except for Article 14 “Standard for
Examination of Documents” so as to maintain the position that is recognised by courts of the
information, page, etc., that the document checker is expected to review. It does not mean the
front as opposed to the back of a document. The term means the review of a document in line
with international standard banking practice and the features of the document itself.

7.8 Article 14a Standard for Examination of Documents


A nominated bank acting on its nomination, a confirming bank, if any, and the issuing bank must
examine a presentation to determine, on the basis of the documents a/one, whether or not the
documents appear on their face to constitute a complying presentation.

7.9 Article 14b Reasonable time


UCP500 Article 13b:
Bank shall have a reasonable time, not to exceed seven banking days… to examine the
documents and determine whether to take up or refuse the documents and to inform the party
from which it received the documents.
UCP600 Article 14b:
Bank shall have a maximum of five banking days following the day of presentation to determine
if a presentation is complying.

Reasonable time has been a concept not specifically defined within UCP other than the
establishment of an outside limit. Not automatically the seven banking day outside limit provided
by the UCP. There was general agreement to remove the words “reasonable time” from UCP 600
and include a maximum number of days.

7.10 Article 14d - Data in Documents


Data in a document, when read in context with the credit, the document itself and international
standard banking practice, need not be identical to, but must not conflict with, data in that
document, any other stipulated document or the credit. Is this forcing a requirement for
‘Linkage’ of data in documents? Checking for such linkage adds to banks costs and risk but does
it add any significant additional protection to the parties involved? In ISBP there is no
requirement for a mirror image.
If a bank wants linkage it can include such requirement in the LC.

7.11 Article 14j - Address on Documents


When the addresses of the beneficiary and the applicant appear. in any stipulated document,
they need not be the same as those stated in the credit or in any other stipulated document, but
must be within the same country as the respective addresses mentioned in the credit. Contact
details (telefax, telephone, email and the like) stated as part of the beneficiary’s and the
applicant’s address will be disregarded. Exception is when address of applicant is to appear as
part of consignee or notify party details on a transport document subject to articles 19, 20, 21,
22, 23 or 24 of these rules.

7.12 Article 14l - Issuing of Transport Documents


A transport document may be issued by any party other than a carrier, owner, master or
charterer provided that the transport document meets the requirements of articles 19, 20, 21,
22, 23 or 24 of these rules.

7.13 Article 15 - Complying Presentation There is now a definition referring to the event of
presentation and the obligation of the Issuing and the Confirming Banks, and the responsibility
of a Nominated Bank on the documents so presented.

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7.14 Article 16 - Discrepant Documents, Waiver and Notice
This article has been expanded in order to stress the need for a single notice and to outline the
required content of such notice. (receiving waiver from the applicant)

7.15 Article 17 Original Documents


Now follows the principle of ICC Policy statement dated 12 July 1999 in respect of original
documents and includes an express provision that each required document must be presented at
least in one original.

7.16 Transport Articles 19- 22


UCP 500
Article 23: Marine/Ocean Bill of Lading
Article 24: Non-Negotiable Sea Waybill
Article 25: Charter Party Bill of Lading
Article 26: Multimodal Transport Document
UCP 600
Article 20: Bill of Lading (i.e. Port-to-Port)
Article 21: Non-Negotiable Sea Waybill
Article 22: Charter Party Bill of Lading
Article 19: Transport Document covering at least two different modes of transport

7.17 Transport Articles 23- 25

UCP 500
Article 7: Air Transport Document
Article 28: Road, Rail or Inland Waterway Trans port Document
Article 29: Courier and Post Receipts
UCP 600
Article 23: Air Transport Document
Article 24: Road, Rail or Inland Waterway Transport Document
Article 25: Courier Receipt, Post Receipt or Certificate of Posting

7.18 Art. 30 UCP500 Transport Document Issued by a Freight Forwarder


There is no need for an equivalent of UCP500 Article 30. A freight forwarder signing as agent of
a carrier or as carrier is covered in UCP 600 Article 20 and the content of the other transport
articles. Majority of countries voted for removal of this article from new draft. It should be noted
that UCP has never excluded transport documents because the issuer was a forwarding agent

7.19 Transport Articles 19 - 25


Transport Document Covering at least Two Different Modes of Transport has been placed at the
front of the transport articles as it is the more common type of document used today.
Deletion of reference to carrying vessel propelled by sail only.

7.20 Transport Articles 19 - 25 Re-definition of Transhipment

UCP 500: Sea / Air / Road / Rail / Waterway


For the purpose of this Article, transhipment means unloading and reloading from one vessel /
aircraft / means of conveyance to another vessel / aircraft / means of conveyance.

UCP 600: Sea / Air / Road / Rail / Waterway


For the purpose of this article, transhipment means conveyance and reloading to another vessel
/ aircraft / means of conveyance.

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7.21 Transhipment
LC requiring presentation of BL and containing a prohibition against transhipment will, in most
cases, have to exclude UCP600 sub-article 20(c) to make the prohibition against transhipment
effective.
c.i. A bill of lading may indicate that the goods will or may be transhipped provided that the
entire carriage is covered by one and the same bill of lading. ii. A bill of lading indicating that
transhipment will or may take place is acceptable, even if the credit prohibits transhipment, if the
goods have been shipped in a container, trailer or LASH barge as evidenced by the bill of lading.

7.22 Article 28 Insurance Document


Previously in UCP 500 Article 34 Insurance Documents; Article 35 Types of Insurance Cover; Arti-
cle 36 All Risks Insurance Cover.
Insurance document must be issued and signed by an insurance company, an underwriter or
their agents or their proxies. Cover notes will not be accepted (previously cover notes issued by
brokers) The Insurance document must indicate that risks are covered at least between the
place of taking in charge or shipment as stated in the credit and the place of discharge or final
destination as stated in the credit. Amount of insurance coverage must be at least 110% of the
CIF or CIP value of the goods. An insurance document may contain reference to any exclusion
clause.

7.23 Article 31 Partial Drawings or Shipments


A presentation consisting one or more sets of transport documents evidencing shipment on more
than one means of conveyance within the same mode of transport will be regarded as a partial
shipment, even if the means of conveyance leave on the same day for the same destination.

7.24 Article 35 - Disclaimer on Transmission of Documents


UCP 600 outlines the responsibility of the Issuing or Confirming Bank in the event of documents
being

7.25 Article 36 - Force Majeure


UCP 600 includes acts of terrorism

7.26 Article 38 Transferable Credits


UCP 600 requires the presentation of documents by or on behalf of a second beneficiary be
made to the transferring bank

8. Further Issues
8.1 International Standard Banking Practice (ISBP)
ISBP is being redrafted and is expected to be available by 01 July 2007 on which date UCP600
comes into force. All countries indicated the value of ISBP. However, ‘international standard
banking practice’ is deemed to be wider than just the ISBP publication. Therefore the full title of
the publication has been avoided. There was general agreement that there may be reference to
ISBP within foreword / introduction to the UCP but not a specific mention therein.

8.2 Status of Position Papers


The Position Papers issued under UCP500 will no longer be applicable under UCP600.

8.3 UCP 600 Commentary


ICC will as usual issue the Commentary on UCP600 giving a detailed description on the changes
and the reasons for such changes and this publication is expected to be available before 01 July
2007.

8.4 Review of Opinions for UCP 600 applicability


ICC does not consider it necessary to review their Opinions under UCP500 since such opinions
were based on a particular set of facts and cannot be always generalised.

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9. SWIFT Changes
9.1 Alignment with UCP 600 Article 1 Application of the UCP
New mandatory field 40A Applicable Rules with list of codes

Previous default rule contracted UCP 500 Article 1 ‘where they are incorporated into the text of
the Credit. Implied information may be an issue for courts and parties not familiar with SWIFT.
Implemented in November 2006

9.2 Alignment with UCP 600 Transport Articles


Four new optional fields (65 characters) Current fields unclear especially for Multimodal
documents

Not properly aligned with UCP 500 / 600


Implementation November 2006

10. SWIFT Guidelines


10.1 Alignment with UCP 600 Article 6 Availability, Expiry Date

Change the definition of field 31D Date and P/ace of Expiry: ‘For Credits that are only available
with the issuing bank, the place of the issuing bank must be repeated in sub-field ‘place’ of field
31D

Implementation 1 July 2007


Subject to SWIFT National User Groups and Board approval

10.2 Alignment with UCP 600 Article 6 Place for Presentation

Change the definition of field 41a Available With … By … to mention availability and place of
presentation Implementation 1 July 2007
Subject to SWIFT National User Groups and Board approval
10.3 Alignment with UCP 600 Article 16 Discrepant Documents, Waiver and Notice
Currently, filed 77B Disposal of Documents in the MT734 Notice of Refusal only contains codes
HOLD and RETURN Any details regarding the disposal of documents for which the existing two
code words cannot be used, must be described by means of narrative text or new code words
Implementation 1 July 2007 (temporary), Oct 1 Nov 2007 (permanent)
Subject to SWIFT National User Groups and Board approval

The real test of whether or not UCP600 achieved its objectives will only be known once it comes
into force. The main responsibility lies with the Banks issuing Documentary Credits, which must
ensure that instructions are precise and that there is no ambiguity in the terms and conditions
stipulated in the Credit.

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