Sunday, June 02, 2013

Do letters of credit have expiry dates?

Do letters of credit have expiry dates?[i]
 Rupnarayan Bose[ii]

“Date”, in relation to documentary credits, appears in various contexts in the UCP. We come across expressions such as “expiry date of credit”, “last day for presentation”, “expiry date for honour or negotiation” or simply “expiry date”. This article attempts to interpret these expressions in the context of documentary credits and proposes what “expiry date” as stated in a credit is supposed to signify.
An L/C, in many ways, is similar to a contract[iii]. A credit’s author is called the issuing bank. When a bank issues a letter of credit, it takes on certain financial risks and responsibilities on behalf of its client (applicant). According to sub-Article 7(b) of UCP 600:An issuing bank is irrevocably bound to honour as of the time it issues the credit.” Thus, the date of issue of a credit (SWIFT Field 31C, MT700) is when, as far as the issuing bank is concerned, a letter of credit comes into being.
While it is for the issuer to set the terms of the documentary credit, it’s for the beneficiary to accept or act on it. The beneficiary is not obliged to ship the goods, nor is he compelled to present documents – even if he’s in possession of a valid L/C. The contract is accepted or taken up by the beneficiary only when he “performs” under the L/C. The same holds true for a non-confirming nominated bank. Sub-article 7(c) states: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.” Only a specific performance – defined by the UCP as “complying presentation” (Article 2) – under the L/C obliges the issuing bank to honour its commitment to pay the presenter.
The commitment of the issuing bank to pay (honour) begins with the issue of the credit. The issuing bank is “irrevocably bound to honour”. Sub-article 10(a) titled “Amendments” states: “Except as otherwise provided by Article 38, a credit can neither be amended nor cancelled without the agreement of the issuing bank, the confirming bank, if any, and the beneficiary.” Note the words “neither be amended nor cancelled.” This is the very basis of the irrevocability of a documentary credit.
On receipt of the negotiated documents, the issuing bank is required to act under sub-article 7(c) and Article 13. These articles are all about reimbursing the presenting bank on the utilization of the credit. If the credit is utilized fully, or if further shipment or presentation is not envisaged, then it is as good a time as any for the issuing bank to proceed to (technically) cancel the credit (or whatever is left of it). A closure by the issuing bank is necessary for accounting purposes but, more importantly, for the effective termination of the outstanding liabilities of the applicant towards the issuing bank and that of the issuing bank to the other parties to a credit.
Termination/cancellation/expiry
Sub-article 10(a) stipulates that an L/C can be cancelled only with the consent of all the parties to a credit. The question is when, if at all, can the “irrevocable” commitment of the issuing bank be effectively terminated? When can an irrevocable L/C be cancelled, the outstanding entries in the issuing bank’s books reversed? What precisely is the expiry date of a credit? Does it have an expiry date? Can an issuing bank cancel its own L/C when its further use is no longer envisaged or when a particular credit is long past its expiry date and no document has been received by the issuing bank within a reasonable time from the credit’s last date for presentation? Where do these UCP provisions (or the lack of them) leave the issuing bank? Let’s examine the issues a little more closely for answers.
Sub-article 6(d)(i) stipulates:A credit must state an expiry date for presentation.” This is immediately followed by a qualification, viz.: “An expiry date stated for honour or negotiation will be deemed to be an expiry date for presentation.” Sure, why not? Provided the L/C makes mention of the so-called “expiry date stated for honour or negotiation”. Does it do so? Does the UCP require the issuer to do so? The answer is clearly an emphatic “No”. For what Article 6 requires is that “a credit must state an expiry date for presentation. (emphasis added). Since one follows the other, if an L/C is not required to or does not state an expiry date for “honour or negotiation”, whether or not the expiry date stated for honour or negotiation is the to be deemed as the an expiry date for presentation becomes a non-issue. Is there any “expiry date stated for honour or negotiation”, either in the UCP or in practice? The second sentence of sub-article 6(d)(i), therefore, appears irrelevant, meaningless.
Where in an L/C would we find “an expiry date for presentation” as required under sub-article 6(d)(i)? SWIFT MT700, the format used worldwide for the issue of L/Cs, includes the following:
Swift Field Code
Interpretation
20
Documentary credit number
23
Issuing bank's reference
31C
Date of issue
31D
Date and place of expiry
41D
Available with...by...
42C
Drafts at
42D
Drawee - name and address
48
Period of presentation

In my opinion, the “an expiry date for presentation” can be found nowhere else but only against SWIFT Field 48 titled “Period of presentation”. The issuing bank’s narration usually goes as follows:
“Documents must be presented for payment within (alternately, no later than) “X” days from/after the date of shipment, however before the expiry of the credit.”
This ought to meet the requirements of sub-article 6(d)(i). The only issue we are left with, then, is to identify the true expiry date of a credit, if any. This carries its own significance.
SWIFT fields
The SWIFT Fields shown in the table, unless otherwise stated, refer to matters related to the credit itself. Field 31C, for example, defines the “date of issue” of the credit. Field 41E stipulates the “applicable rules” governing the operation of the same credit. Field 41D is about which bank or banks that same credit is “available with” and the manner of its availability. From Field 42C we know that it refers not to the credit but to drafts drawn under it. Similar subject headings are used in the printed forms of banks for the issue of documentary credits. We can safely conclude that Field 31D states the “date and place of expiry” of the same credit referred in that particular message. All commercial banks, transporters and others involved with documentary credit operations interpret the date as the true “expiry (date) of the credit”. This has never been disputed, not even by ICC.
Let me reiterate that this date is not the “expiry date for presentation” under sub-article 6(d)(i) of UCP 600, nor is it “an expiry date stated for honour or negotiation”. No credit – whether issued under SWIFT format or otherwise – has ever shown on its face a date that clearly indicates it is meant to be “expiry date for presentation” of documents. The date mentioned against Field 31D has never been qualified as such. In the same L/C, we cannot have two expiry dates for presentation, one against Field 48 and another against Field 31D.
The UCP does not stipulate an outer date limit for the honour or negotiation of a complying presentation, only for examination and the issue of refusal notice (if any). It does not set a time limit for the forwarding of documents to the next bank, not even a cursory “without delay”, say, in Article 15. As part of the L/C terms, the issuing bank may stipulate that the nominated bank should send a SWIFT message to the issuing bank immediately on the negotiation of documents, informing it about the negotiation. But whether the failure to send such a message or the non-receipt thereof by the issuing bank would constitute non-compliance – and therefore, a discrepancy – is very much debatable[iv].
The actual expiry date
The expiry date of an L/C and expiry date for presentation are separate and distinct in their respective applications. The former, the date stated against Field 31D, bears no relation whatsoever to the date stipulated in sub-article 6(d)(i) in terms of the “expiry date for presentation” or “an expiry date stated for honour or negotiation”. These two expressions should, instead, be linked only to MT700 Field 48 or such requirements appearing in the printed formats for the issue of L/Cs. The provisions of Article 6 are obviously not being applied correctly or uniformly across the board.
Further, note the structure of the operative section of sub-article 6(d)(i) which states:An expiry date stated for honour or negotiation will be deemed to be an expiry date for presentation.” The UCP does not state that the expiry date in the credit is really not its expiry date, but instead is nothing but the last date for presentation. The UCP simply says that the expiry date of the credit should (also?) “be deemed to be an expiry date for presentation”. Well, why not?
Conclusion
The expiry date (like the other terms in a credit) is set by the issuer when the L/C is originally issued. It should be remembered that as the issuer of credit the issuing bank has every right to set a date after which an offer, an agreement or a contract may expire. Article 1 permits the terms of an L/C to prevail over those in the UCP. Accordingly, the expiry date against Field 31D should be free of the baggage thrust on it by sub-article 6(d)(i). Being thus freed, the unqualified mention of any expiry date in a documentary credit should be interpreted as exactly what it is supposed to mean, viz., the date after which a credit ceases to be valid, is taken as lapsed, cancelled, void or inoperative.
An L/C is, therefore, not an open-ended agreement or contract. After its date of expiry, its cancellation should not require the consent of all parties to the credit (sub-article 10.a). After its expiry date, its shelf life should be deemed to be over. Negotiation or honour ought to take place before the expiry of an L/C –as long as it is still valid and operative. Unless amended or utilized prior to its expiry, presentation, examination, honour or negotiation of documents should not be permitted after the expiry date stated in a credit. I am aware that arguments in this article turn a number of conventions and practices on their heads. Yet, in the light of what’s argued in this article, a re-examination of some of the provisions of the UCP may, perhaps, be necessary.
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Rupnarayan Bose’s e-mail is mbose@gmail.com


[i] Published in DCInsight, pp 16, Vol 19 No. 2, April-June 2013.
[ii] CEO, International Trade Services. Website: www.internationaltradeservices.in. Contact: rnbose@gmail.com.
[iii] Refer to this author’s article “Some random thoughts on the UCP”, LC Monitor-Trade Services Update, Special Edition, January 2011.
[iv] Refer to article Wanted: A more positive Article 15, Rupnarayan Bose, DCInsight, Vol. 18, No. 4, October-December 2012.