Tuesday, April 30, 2013

Wanted: A more positive article 15

Wanted: A more positive article 15[1]

The expressions “reasonable time” and “without delay”, because of their non-specific nature, came under intense scrutiny during the drafting of UCP 600. “Without delay” survived, but the appearance of the expression “reasonable time” in sub-article 13(b) of UCP 500 was to be its last. The latter was removed completely from UCP 600. Five years on, few seem to feel its absence.
“Without delay” conveys a greater sense of urgency than “reasonable time”. “Reasonable time” stretches the permitted time to an outer limit that could perhaps be justified under a given circumstance. Yet, both of the expressions are subjective in nature; neither indicates any definitive time frame nor a globally acceptable standard. It’s debatable whether any period could, in all fairness, be set as a “reasonable time”. Hence, it could not be part of any internationally applicable rules. If considered from a technical or legal point of view, a definite number of days was desirable. But even in its absence, most people preferred clear definitions and guidelines, black-and-white solutions over stipulations that were indefinite or vague in nature. A definite period was easier to handle. Compliance, or its breach, was easier to determine.
“Without delay”
The term “without delay” posed similar problems. A few members of the UCP 600 Drafting Group felt that the term should be disregarded, as were similar terms in the UCP such as “immediately” and “as soon as possible”. This was because, like “reasonable time”, “without delay” did not specify a definite period. Finally, it was decided to live with the expression, with the expectation that banks would act in accordance with the intent with which the words were used, i.e., expeditiously. In the final version of UCP 600, the expression “without delay” appears in six places.
The demand for setting a fixed number of days had its opponents. They insisted that the reason for having retained “reasonable time” in the UCP was because not every situation or circumstance could be envisaged in advance, rigidly defined or put in a straightjacket. The variety of credits was considered to be too complex. The inclusion of these expressions was said to convey a sense of responsibility and accountability. One view was that if the concept of “reasonable time” were removed, a bank might not take the initiative to examine the documents presented and to pay well before the maximum period allowed under a credit. The expression “reasonable time”, they claimed, saved bankers from having to justify to either party why the applicant had to part with the funds earlier than the maximum period allowed, or why it took more than a day or two to honour the documents presented.
Thus, the UCP 500 expression “shall each have a reasonable time, not to exceed seven banking days” allowed some leeway, with a built-in safeguard by way of a cap regarding the outer limit for the examination of documents. From the revised UCP 600 expression “shall each have a maximum of five banking days” (emphasis added), it could appear that ICC was not reducing the time from seven to five banking days; instead, it might be claimed that  the available time was only being increased from a shorter time frame (guided by the circumstances of each case and practical considerations) to five days under the new UCP.
Even so, the majority of the Banking Commission members desired clarity. When the issue came up for a vote at the June 2005 Dublin Meeting of the Commission, all except one country voted for the removal of all references to the words “reasonable time”. This made life easier for the Drafting Group, though the late Ole Malmqvist wrote: “For the Drafting Group, that was a nice clear decision, but I wonder if that change will lead to a general delay in payments to beneficiaries. If it does, we trade finance bankers will regret that we deleted it, and in a few years – fewer than if we retain the “reasonable time” concept – we will have plenty of time to wonder why we did it.”
Further steps
In addition to doing away with the undefinable concept of “reasonable time” in favour of a fixed number of days, The Drafting Group went a step further. It wrote into the rules a new article , article 15, titled “Complying presentation”. This article states in clear terms what, until then, had been confined largely to considerations of “international standard banking practice”. The new article now sought to delineate the responsibilities of a nominated bank, a confirming bank and an issuing bank on receipt of a complying presentation. Whether article 15, as it stands today, helps to add any value, any new dimension or rule to the existing practice, is debatable. The fact remains that the Drafting Group, in its wisdom, found it necessary to identify and to close a perceived gap in documentary credit procedures.
Any modification to the rules which helps to remove grey areas is always welcome. From that standpoint, although “without delay” remains, deletion of “reasonable time” was as welcome as the addition of Article 15 to the rule book. The insertion of Article 15 in the UCP is an instance of not relying wholly on international standard banking practice (yet another vague expression), but making the rules more specific.
A “black hole”?
What puzzles this writer is the reason why the Drafting Group did not take the provisions of Article 15 to their logical conclusion. While they went to considerable lengths to eliminate and replace vague, non-specific phrases, they appear to have left a procedural “black hole” in Article 15.
Sub-article 15(a) states: “When an issuing bank determines that a presentation is complying, it must honour.” Quite so! But the question is “When, within how many days?” What’s the point of creating a so-called rule to tell the issuing bank that it must honour (nothing new there; the issuing bank is already bound by Article 7 to do so), but stop short of stipulating a reasonable time for the same?
A similar question arises with regard to sub-article 15(b). It states: “When a confirming bank determines that a presentation is complying, it must honour or negotiate and forward the documents to the issuing bank.” Apart from the matter of forwarding documents, this sub-article simply repeats a section of sub-article 8(a). The confirming bank is under no obligation or compulsion to negotiate within a “reasonable time” (similar to the issuing bank), or to forward the documents “without delay” to the issuing bank.
Sub-article 15(c), the last in the trilogy, is stranger still. It states: “When a nominated bank determines that a presentation is complying and honours or negotiates, it must forward the documents to the confirming bank or issuing bank.” Nothing unique here. It’s acknowledged that a nominated bank is under no obligation to negotiate even if a presentation is complying. But what about its obligation to the presenter to either negotiate or to return the documents – all within a reasonable time, without delay? Is this too much to ask?
A remedy
Sub-article 7(c) begins with the sentence, “An issuing bank undertakes to reimburse a nominated bank that has honoured or negotiated a complying presentation and forwarded the documents to the issuing bank.” The absence of any mention of “reasonable time” or “without delay” here is not only perfectly acceptable and logical, but also eminently desirable. However, the issuing bank could face difficulty in refusing to honour or pay against reimbursement claims received after considerable delay (e.g., documents negotiated subsequent to a complying presentation, but received by the issuing bank, say, one or two years after the expiry or cancellation of a credit). In case of such refusals, the issuing bank has no protection today under the UCP. Under article 7.b, the issuing bank is “irrevocably bound” by its undertaking to honour. This undertaking is open-ended; it provides for a last date only for the presentation of documents (article 6), but none whatsoever for its expiry. Tweaking Article 15 provides an opportunity to remedy this situation.
In its present form, Article 15 hardly states anything that has not been stated elsewhere in the UCP. What it fails to do is spell out the obligations of the banks as conclusively as possible. For the reasons stated here, Article 15 should be taken to its logical conclusion by adding either “reasonable time” or “without delay” to each of the three sub-articles. This would add a positive, decisive thrust to the rules and underscore the reason why “reasonable time” in the UCP was replaced in the first place with a definite period of time.

[1] Published: DCInsight, Page 10, Vol 18, No. 4, October-December 2012.

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