Tuesday, June 27, 2017

Reading between the lines: UCP Article 1


Rupnarayan Bose[1]
Introduction
Letter of credit (LC) is one of several instruments used in international trade for the settlement of dues between the parties concerned. It offers reliability, safety and a reasonable degree of certainty of payment in an uncertain world. For these reasons the LC is said to be the most preferred instrument of choice for exporters and importers. The rules governing LCs’ operations flow from a document called the Uniform Customs and Practice for Documentary Credits (UCP) created by the International Chamber of Commerce, Paris. These rules were first published in 1933. It had been revised several times since then. The current version is operative from 1 July 2007. The UCP remains the most successful set of private rules for trade ever developed.
History of the UCP[2]
The first attempt to codify letter of credit practice can be traced back to 1929 when the ICC, following an earlier American initiative, introduced its ‘Uniform Regulations for Commercial Documentary Credits’ (Bernard Wheble 1971, p. 97). Unfortunately these regulations were only limited to Belgian and French banking practices, and whilst these failed to gain wide acceptance, they nevertheless provided a basis for further development.
In 1933 the ICC issued the ‘Uniform Customs and Practice for Commercial Documentary Credits’. This set of rules “received formal acceptance in some 40 countries” (Wheble 1971, p. 98). Although the 1951 Revision doubled the acceptance of these rules, it was not until the issue of the Uniform Customs and Practice for Documentary Credits in 1962 that global acceptance took place. Since then the rules have been regularly updated, at approximately 10 years’ intervals, in 1974, 1983 (UCP 400) and 1993 (UCP 500) to arrive at the current 2007 Revision, commonly referred to as the UCP 600.
There is a curious bit of history attached to the numbering of the UCP. No reference number as we know them now was initially used. From the 1984 revision the trading and banking communities began to refer to the Uniform Customs and Practice for Documentary Credits by its acronym of UCP and adding to it the ICC publication number (the official text of the rules), to indicate the revision in use. Therefore the 1983 revision became the UCP 400, the 1993 revision became UCP 500 and the 2007 revision became UCP 600. Working backward, if we now recreate the sequence, it would appear as follows:

Year of publication
Revision
Publication no.
1933
First UCP
No. 82
1951
First revision
No. 151
1962
Second revision
No. 222
1974
Third revision
No. 290
1983
Fourth revision
No. 400
1993
Fifth revision
No. 500
2007
Sixth revision
No. 600

The rounding off of the publication numbers started only from 1983. In fact, it has become an interesting exercise for the practitioners of documentary credit operations to speculate what the publication number of the next UCP could possibly be.
For the seeker of enlightenment
Bills presented under letters of credit are costlier to operate than collection bills (governed by the Uniform Rules for Collection, ICC Publication no. 522). This is a primary reason why the trading community, even if they start with LCs, tend to migrate to collection bills as it gains in confidence. The bigger constraints, however, lie in matters of comprehension of and compliance with the UCP provisions. To the laymen – whether traders, merchants or bankers –the UCP provisions appear a tad too difficult to grasp at first reading. The reason is that the frontline practitioners do not have the information, or the benefits of easy access to, critically important ICC publications such as the ISBP (International Standard Banking Practice for Documents presented under UCP 600), the various ICC Banking Commission Opinions (for example the Collected Opinions of the ICC Banking Commission 2005-2008 (publication no. 632), Commentary on UCP 600 (ICC publication no. 680), or the Docdex decisions – each of them so very essential for the proper understanding of the rules of the game. Another factor is the cost; the ICC Publications are prohibitively costly and therefore, are mostly out of reach of the common man.
This article explains the norms for the use of the UCP. This is embodied in Article 1 of UCP 600.
Article 1, UCP 600
It is said that brevity is the soul of wit. It may well be so. But when it comes to the serious business of international trade and the Uniform Customs and Practice for Documentary Credits (UCP), brevity is not a virtue. To a reader, at first glance the meaning would hardly be clear or understandable. One must, perforce, go beyond the written words, read between the lines, seek external sources, or enquire with experts before one gets to understand what a particular provision is all about. More often than not, and as explained earlier, the ICC ‘Rules’ themselves are required to be supplemented by clarifications, explanatory publications, or ICC Banking Commission Decisions and Opinions for the real messages to get across.
Article 5 is one such, which says, ‘Banks deal with documents and not with goods, services or performance to which the documents may relate.’ Pithy in construction, it’s a cornerstone of the UCP. It propounds the most vital principle around which the world of documentary credits revolves. Not surprisingly, it happens to be the second-shortest article in UCP 600. True to character, it hides much, much more than it reveals.
But let us keep these issues aside for another day. The subject of this piece, Article 1 of UCP 600, is a provision that also demands quite a lot of explaining. Slightly longer than Article 5, it too leaves a lot unsaid, its wide scope and connotation understated. This article, titled ‘Application of UCP’, says:
The Uniform Customs and Practice for Documentary Credits, 2007 Revision, ICC Publication no. 600 (“UCP”) are rules that apply to any documentary credit (“credit”) (including, to the extent to which they may be applicable, any standby letter of credit) when the text of the credit expressly indicates that it is subject to these rules. They are binding on all parties thereto unless expressly modified or excluded by the credit.
Our task now is to read between the lines of this UCP article, and understand the full implication of the provisions stated therein.
The purpose of these ‘rules’
Let us begin with the name of the main document itself, viz., Uniform Customs and Practice for Documentary Credits. As the very name suggests, this ICC publication represents the uniform customs and practice (for documentary credits). The emphasis here is on the very first word, viz., ‘uniform’. As we all know, cross-border trade must inevitably contend with a wide range of customs, procedures, practices, expressions and terminologies. Given these factors, interpretations too tend to differ from one country or region to another. Murphy’s Law states, “Anything that can be misinterpreted will be misinterpreted”. In international trade where parties differ in almost everything from country to country, this possibility is gets multiplied even more. The consequence hardly needs any elaboration.
In order to minimise, and if possible – eliminate, the adverse effects of confusion and ambiguity on trade operations, the International Chamber of Commerce, Paris, took it upon itself to introduce a sense of uniformity in the interpretation of the terms and expressions commonly used in relation to international trade. Accordingly, the ICC sought to frame rules, provide standard definitions or interpretations for the more frequently used terms. The objective was to bring on to a common platform the interpretations of the rules, standardise practices and terminologies – irrespective of the users’ location, language, background, culture, practice or procedure.
The UCP, therefore, may be termed as a codified, standardised set of best practices or code of conduct (arrived at through evolution, and a lengthy process of discussions with the stakeholders prior to every revision) for the smooth operation of international trade through the medium of letters of credit. (A similar approach was taken towards the Incoterms Rules, the URDG and other publications of the ICC.)
The UCP articles are merely ‘rules’
As the UCP itself states, the articles are rules. They are not laws, are not statutes propounded by a statutory body or authority of any country anywhere in the world. Hence, whenever there is any conflict between the UCP and the law of the land, the latter would invariably prevail.
If that be so, of what relevance is the UCP to us? History tells us that the UCP has proved its worth many times over ever since it was first published in 1933. The UCP has helped the international trade community to bridge the great divide in culture, language, customs and interpretation among countries through standardisation of procedures and practices. Its rules have been extensively commented on, tested in many courts of law or in arbitration procedures. A vast storehouse of case laws and judicial pronouncements exist on the merits and practical application of the UCP articles. Through these processes over the years, the rules of the UCP have gained acceptance worldwide as the world standard and critically important point of reference as far as documentary credit operations are concerned.
Only by specific consent
This brings into focus the next part of Article 1 which states, ‘….when the text of the credit expressly indicates that it is subject to these rules.’
For any agreement or a contract to come into existence, consent of the concerned parties is required. Since the UCP does not have the force of a statute, adoption of the UCP Rules by the parties to a credit is neither automatic (by default) nor mandatory. If the parties agree to subject themselves to the rules of the UCP, they may do so purely at their option and free will, and accordingly so state. Consequently, the issuer must clearly state on the face of the credit that it is subject to the UCP ICC Publication No. 600 (or the then operative version). Then, and only then, would the coverage of the UCP extend to operations under that credit (for exceptions, see next). If incorporated within the contract or agreement, it gains further strength. Breach of the ‘rules’ would invite consequences as provided in the UCP.
The default option
The last sentence of Article 1 is of great significance. The first part of it states, ‘They are binding on all parties thereto….’ Simply put, it means that once the parties through specific declaration subject themselves to the UCP, the rules are binding on them. (This principle flows from the Contract Act, and is similar to any properly executed agreement or contract.). Yet, the story is not complete. The qualification that follows immediately thereafter has more to it than meets the eye.
‘Binding’ is not absolute
The last sentence of Article 1 qualifies the expression ‘binding to all parties’ with the words, ‘…unless expressly modified or excluded by the credit.’ The latter expression tells us that any provision of the UCP could be modified, or excluded altogether, if the concerned parties so desire, even if a documentary credit clearly stated that it was issued subject to the UCP.
The following points in this regard are worth noting:
(a)   Any condition in a particular LC that changes a provision of the UCP effectively modifies the application of the UCP. The UCP provisions, therefore, could be considered as the ‘default’ options.
(b)   If the wording of a credit gives a different outcome to that which a particular UCP 600 article would otherwise give, then the rule is modified rather than excluded.
(c)   Exclusion happens where the entire article is deemed to be inapplicable to the credit and no alternative wording is inserted. In this circumstance, the credit should state that ‘article x or y is excluded’.
(d)   Where a term or condition in the credit is to be applied differently to that envisaged in the UCP 600, the wording of the credit will supersede that of the UCP. No further reference is required to be made to the UCP article or sub-article that is being modified.
(e)   If exclusions or modifications are made that worsen the position of the beneficiary or the nominated bank then it is for those parties to determine whether or not to act under those conditions. In certain circumstances, amendments could be necessary (to resolve the problem).
A few words of caution may not, perhaps, be out of place here. In spite of this apparent freedom to modify the UCP provisions, the licence should not be taken lightly. Remember that every new version of the UCP is the result of approximately three or more years of drafting process, includes intensive rounds of meetings and discussions, the involvement of a wide spectrum of experts and stakeholders related to documentary credit operations, participation by the National Committees of more than 40 countries around the world, and extensive groundwork by the ICC Drafting Group. Given the amount of work that goes into the finalisation of every new version of the UCP, the least that we could do is to address every proposed modification or deletion of a provision with the same seriousness, wisdom and circumspection.
The ‘Introduction’ to the International Standard Banking Practice (ISBP), ICC Publication No. 745, sounds a gentle word of caution in this regard. It says,
‘It should be noted that any term in a documentary credit which modifies or excludes the applicability of a provision of UCP 600 may also have an impact on international standard banking practice. Therefore, in considering the practices described in this publication, parties must take into account any term in a documentary credit that expressly modifies or excludes a rule contained in UCP 600.’
It should be ensured that the proposed changes (modification, deletion or exclusion) do not lead to unintended or undesirable consequences.
What can be modified?
We often face a dilemma as to the extent to which the UCP provisions may be modified. The solution to this is quite simple: to the extent that the UCP allows it to be modified. To that extent, the modifications or deletions are covered (and protected) by the UCP. However, the protection offered by the UCP does not extend to modifications not provided for in the UCP articles. Article 38(g), which stipulates what could be modified while transferring a credit, is a very good example of this position. Another example is ‘silent confirmation’, an industry practice which is outside the purview of the UCP.
Simply put, while issuing a documentary credit, feel free to modify the application of the UCP provisions – provided that you know what you are doing; that you understand the implications of your actions and take responsibility for the consequences.
Conclusion
True to the character of several articles of the UCP, Article 1 too appears deceptively simple and straightforward. Yet, it must be read very carefully, between the lines, if its meaning is to be fully appreciated. Frankly speaking, most of the articles of the UCP appear to this writer to have been similarly crafted – expressing as briefly as possible rules which are of great significance, the understanding of which calls for wisdom, experience and the deeper application of mind on the part of the reader.
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[1] Home page http://www.rnbose.com. The author is a consultant, faculty and a specialist on international trade rules. Contact: RNBOSE@GMAIL.COM.
[2] Source: UCP 600: Letter of Credit Rules Revised, Roberto Bergami, School of Applied Economics, Institute for Community Engagement and Policy Alternatives, Victoria University, Melbourne, Australia. http://www.melbournecentre.com.au/Finsia_MCFS/2007/Roberto_Bergami_final.pdf