Wednesday, September 20, 2017

AVAILABILITY AND EXPIRY UNDER ARTICLE 6, UCP 600 [1]

Introduction[2] 
I am sure one can easily recall the following lines from the popular musical The Sound of Music:
“How do you solve a problem like Maria?
How do you catch a cloud and pin it down?”
Replace ‘Maria’ with issues like negotiation, pre-payment, drafts, shipment date – you name it – and you may feel like I do about some of the provisions in the UCP. This article is an attempt to make sense out of a very live issue, that of availability and expiry under Article 6 of UCP 600.

Sub-articles 6(a) & 6(d)
Sub-article 6(a) states, “A credit must state the bank with which it is available or whether it is available with any bank. A credit available with a nominated bank is also available with the issuing bank.”
Sub-article 6(d)(i) reads as follows, “A credit must state an expiry date for presentation. An expiry date stated for honour or negotiation will be deemed to be an expiry date for presentation.” Note that this sub-article calls for only the date of expiry, not the place of expiry of a credit.
Sub-article 6(d)(ii) states, “The place of the bank with which the credit is available is the place for presentation[3]. The place for presentation under a credit available with any bank is that of any bank[4]. A place for presentation other than that of the issuing bank is in addition to the place of the issuing bank.” According to this sub-article, the place where a credit is available goes hand in hand with the geographical location of the bank with which a credit is available (the nominated or the issuing bank). This sub-article appears axiomatic, no more than explanatory in nature, a reiteration of a situation that should, ordinarily, be a given.

Place of expiry not required in LCs
From the foregoing analysis it is quite clear that the place where the nominated (or the issuing) bank is located is the place where a credit is available. Nowhere does Article 6 – or the rest of the UCP for that matter – require a credit to separately state a place for its expiry. This is because the place for presentation or availability is being effectively determined by sub-article 6(d)(ii). Extending this line of argument a little further, since presentation to a nominated (or the issuing) bank cannot but be made at its physical location, the effective utilisation of a credit must also be only at that place. It follows that the useful life of a credit, to the extent of its utilisation, should also be deemed to have expired at that same geographical location. Following Article 12, the transaction is not vitiated if the documents, upon negotiation, reach the issuing bank after the expiry date of the credit. The issuing bank must honour, if the presentation otherwise complies (Article 7).

The problem areas
We are long used to seeing documentary credits indicate both “date and [a] place of expiry”. If both are the same in a credit, determining availability or the responsibilities of the nominated bank under the UCP poses no problem. The problems begin when the places of availability and expiry are in different countries, e.g.:
  1. The credit is available with (SWIFT MT 700, Field 41A) the issuing bank in country A. The place of expiry (SWIFT MT 700, Field 31D) is in the beneficiary’s country, viz., country B.
  2. The credit is available with a nominated bank in (beneficiary’s) country B; its place of expiry is in (issuing bank’s) country A.
  3. Credit confirmed by a bank in country A. It is available with a(ny) bank at the beneficiary’s place, say, country B, or the issuing bank’s country (C).
(Such credits are not necessarily “badly drawn”. Banks in Africa or Latin America often require credits issued by them to be confirmed by their international correspondent banks operating out of the UK or US for these LCs to be accepted by beneficiaries in third countries. The issuing bank simply forgets to make the credit also available with the confirming bank.)

The first example:
In this example, the credit is available in country A; it expires in country B (the beneficiary’s place of business). The interpretations, as per current dispensation, are as follows:
(a)        “[Here] the beneficiary has the ability to present the documents to a local bank up to the expiry date.[5] [T]he expiry is merely a date for presentation of documents, within the country of the beneficiary. The documents may reach the issuing bank after the expiry but provided they were presented in the country of the beneficiary, within the expiry and otherwise comply, they must honour.[6]
(b)        The credit is not available in country B. No bank in the beneficiary’s country – including the “local bank” (as it appears from the foregoing) – is authorised to honour or negotiate documents under the credit.
(c)        Under such credits, the beneficiary’s only apparent advantage is that he has the option to present documents to a “local bank” within the expiry of the credit or the last date of presentation – whichever is earlier – but is denied the benefits of negotiation or honour.
If the beneficiary requires a bank in his country or place of business to honour or negotiate the documents, he must get the credit amended to make it available in country B.
(d)        Since the credit is available (with the issuing bank) in country A, only the issuing bank is entitled to “act” under the credit.
The only advantage the issuing bank gets out of such credits is that it ensures receipt of documents prior to the credit’s date of expiry.
[If the credit is available (with any bank) country A, but expires at the counter of the issuing bank in the same country, any of the other banks in country A may negotiate or honour, as long as the bank delivered the documents to the issuing bank prior to the expiry of the credit or the last date for presentation – whichever is earlier. The reasoning, thus, remains the same.]
Yet, doubts remain. No bank in country B is named in the credit as a nominated bank – not even for the limited purpose of the LC’s expiry (the credit is not available in B). The credit does not “expressly modify” (Article 1) the UCP. The “local bank”, whichever or wherever it may be located in country B, if it handles the documents, would obviously be acting outside the UCP. If that be so, why would the submission of documents to a bank that is not a nominated bank under the credit, located in a country where the credit is not available, be acceptable, beats me! To the best of my understanding, such submissions should not be considered valid presentations under the UCP, nor be protected by it.
The question is, even though
        (a)          the requirement by SWIFT of a place of expiry in a credit is outside the scope of the UCP,
        (b)          the credit is incorrectly drawn, is unworkable in practice (it expires in a country where it is not available for negotiation),
        (c)          the “local bank” in country B is not a nominated bank,
by continuing to accept a so-called presentation (in country B) as valid, are we not going beyond the UCP to sanctify an obviously defective, badly drawn LC? A typical example of forcing a square peg in a round hole, but to what purpose?

The second example:
Interpretations:
   (1)          The credit is available with a bank or banks in country B. The beneficiary may, therefore, present documents to the nominated bank in country B for honour or negotiation. But this is only part of the story!
   (2)          Since the credit expires (with the issuing bank) in country A, “the nominated bank must determine whether they are in a position to offer honour or negotiation and [simultaneously] ensure delivery of the documents to the issuing bank within the expiry date or any last date for presentation.”[7]
   (3)          Alternately, the beneficiary or (on his behalf) his bank must “present” the documents direct to the issuing bank no later than the expiry date stated in the credit or within the specified number of days after shipment (or 21 calendar days if no period is mentioned) – whichever is earlier.

The issues are as follows:
(a)           Through such credits, the issuing bank ensures only the delivery of documents within the expiry date stated in the credit. But it imposes avoidable constraints on the beneficiary and the negotiating bank. It is important to note that such an obligation of a nominated bank is not expressly or implicitly imposed by the UCP through Articles 12 or 15 – especially sub-article 15(c).
(b)           If the nominated bank (wherever it may be located) negotiates or honours, the LC should normally stand utilised at that point itself. There should not be any requirement thereafter for the documents to be rushed to the issuing bank to meet the deadline for the presentation of documents (the expiry date of the LC).
(c)           Field 31D, working outside the UCP, appears to be creating room for avoidable complications in documentary credit operations, including disputes, possible discrepancies, and rejection of documents.

When is the confirming bank a nominated bank (third example)?
The last of the examples brings us to an issue that is still a subject of debate. Sub-article 8(a) in a somewhat misleading manner begins with the words, “Provided that the stipulated documents are presented to the confirming bank or to any other nominated bank and that they constitute a complying presentation, the confirming bank must:….” (emphasis added). By inserting the word “other”[8] precisely where it is placed in the sentence, the expression “nominated bank” seems to include in its ambit a confirming bank. (Just take the word “other” out of this section, and see how the meaning of the sentence changes.)
Two separate articles in DC Insight issue of October-December 2009 by Mr. Kenny Wang and Ms. Wangofei respectively, and also the article titled Reimbursing the confirming bank under SWIFT Field 41A by Haluk Erdemol[9] add to the debate. Commenting on the two preceding articles, and especially on credits available with only the issuing bank, but requested to be confirmed by the advising bank, Erdemol states, “When an issuing bank nominates a bank to confirm a credit, the credit must be available with the confirming bank along with an expiry date to be valid at the latter’s place or country. Otherwise, what would be the role of a confirming bank if only the issuing bank would be able to honour?...” Precisely the question that everybody is would love to have an answer to.
He concludes, “The statement quoted from the Commentary on UCP 600 means that a confirming bank may not be a nominated bank vis-à-vis the beneficiary, and it has been misinterpreted by the commentator at the cost of disregarding the relationship between the confirming bank and another nominated bank set out in Article 8.”
I do not believe that, in practice, the “relationship” he refers to would make any difference to anyone. The issue is nailed by Commentary on UCP 600 which while referring to Article 12 (page 53) states, “It should be noted that, subject to the structure of the documentary credit, a confirming bank may not be a nominated bank.” Gary Collyer too observes that, “[a] confirming bank need not be a nominated bank….. [For the confirming bank] to be a nominated bank, the credit must so specifically state.”[10]
Clearly, if the confirming bank is not the “nominated bank vis-à-vis the beneficiary”, the beneficiary is not permitted to present complying documents to the confirming bank for negotiation or honour, nor be protected by the UCP. The beneficiary, therefore, can neither utilise the LC nor benefit from the confirmation. Of what good it is, then if, according to Erdemol, the confirming bank is a nominated bank vis-à-vis only the issuing bank?
A close reading of sub-article 8(a)(i)(a) and 8(a)(ii) would show very clearly that for the confirming bank to negotiate or honour, the credit must be “available …. with the confirming bank.” The issuing bank must, therefore, specifically nominate, or extend the availability of the credit to include, the confirming bank (ref. SWIFT MT700, Field 41A) if Article 8 is to be complied with.

The problems with availability: suggested solution
Where did the problems with availability start? Since the majority of the credits issued worldwide is through SWIFT, the origin of the problem may be with them, especially their definition of Fields 41A and 31D (MT700).
Regarding Field 41A, “Available with... by...”, SWIFT usage guidelines[11] state, “This field identifies the bank with which the documentary credit is available (the place for presentation) and an indication of how the credit is available...”. This is absolutely in sync with sub-articles 6(a) and 6(b).
The same “guidelines” interpret Field 31D, “Date and Place of Expiry” of the MT 700 etc. as follows: “This field specifies the latest date for presentation under the documentary credit and the place where documents may be presented...”.
My comments:
  1. Field 31D introduces an altogether unique element, i.e. a place of expiry – quite unwarranted, not envisaged under Article 6 of UCP 600 (especially not under sub-articles 6(d)(i) or 6(d)(ii)).
  2. It would not have mattered in the least where a credit was set to expire as long as it stated when it expired (“A credit must state as expiry date for presentation” – sub-article 6.d.i), had not Field 31D queered the pitch.
  3. The unfortunate (mis)interpretation by S.W.I.F.T., equating “place of expiry” of a credit with “the place where documents may be presented”, flies directly in the face of sub-article 6(d)(ii).
  4. This has also cast needless obligations on the nominated bank not envisaged in the UCP.
Oh, what a tangled web we weave….!

The ICC may claim, “We didn’t start the fire….”, but I wonder if they can be totally absolved of their responsibility for this mess. It seems inconceivable that the SWIFT definitions were implemented without the blessings of the ICC, or that the ICC was not aware of the problems caused by SWIFT Field 31D in MT 700 etc. Yet, over the years, everyone has been forced to live with this thorny issue. The problems have been allowed to fester. Why no action was taken by the ICC to resolve the situation, remains a mystery.
Because, the solution is simple enough. It requires S.W.I.F.T. to delete “and place” under Field 31D, leaving only the “date of expiry”.

As things stand today
  1. Ideally, the place of expiry and the place of availability of a credit should be the one and the same. Anything else is not good banking practice, nor supported by the UCP. Issuing banks may please take note.
  2. Where the places of availability and expiry differ, and till corrective action is taken, the beneficiary and the nominated bank should keep an watchful eye on the landmines.
  3. By confirming a credit, a confirming bank does not automatically become a nominated bank. For a credit to be available with the confirming bank the credit must so specifically state. Otherwise the fees paid to the confirming bank go up in smoke (or, down the drain, take your pick!).
Now, if only we can work together to un-complicate the UCP! If only the ICC take note of these pressing issues and act SWIFT-ly! In the words of Eliza Doolittle, “Wouldn’t it be loverly!”[12]
****




[1] Published in LCM-Trade Services Update, Volume 12, Issue 3, May–June 2010.
[2] Former managing director, Fina Bank Ltd., Nairobi, Kenya and TransAfrica Bank Ltd., Kampala, Uganda. Website: http://www.rnbose.net; e-mail: rnbose@gmail.com.
[3] That should be self-evident! If a beneficiary turns up at Timbuktu to present documents under a credit available with a bank in Hong Kong, something got to be wrong with the beneficiary, for sure.
[4] I’d thought that would be pretty obvious too, but anyway….!
[5] Frequently asked questions on UCP 600, Suggested Answer to question no. 6.29, Gary Collyer.
[6] Frequently asked questions on UCP 600, Suggested Answer to question no. 6.27, Gary Collyer.
[7] Ibid
[8] Shades of My family and other animals by Gerald Durrell, perhaps?
[9] DC Insight, Vol. 16, January-March 2010. Haluk Erdemol is a member of the ICC Banking Commission and ICC’s Turkish National Committee.
[10] Source: Question no. 6.38, Frequently asked questions on UCP 600, Gary Collyer.
[11] SWIFT UCP 600 Usage Guidelines, Exceptional update to achieve alignment, Published on 12 January 2007, S.W.I.F.T. SCRL ("SWIFT"), Belgium.
[12] From All I want is a room somewhere, Rodger and Hammerstein, My Fair Lady.

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