NEGOTIATION AND THE LAW OF CONTRACT[1]

In trade finance and documentary credit operations, the word “negotiation” remains an enduring enigma. No one described the situation better perhaps than the late Ole Malmqvist, a member of the UCP 600 Drafting Group, who, in a DCInsight interview, said: “ … there has been an extended discussion about the word negotiation, which nobody can define and which only a few want to get rid of … I'm still looking for someone who can explain to me the difference between payment and negotiation … so far no one has been able to come up with a definition, not one I have seen, at any rate, so I doubt that anyone will be able to come up with a definition now … The word ‘negotiation’ is a problem … I think we should get rid of the word ‘negotiation’, because we cannot define it and because we don't need the concept[2]. He continued: “ … Every L/C expert knows exactly what negotiation is/means. But ask any three of them for their interpretation and be prepared to receive three different answers![3]”

Reinhard Längerich, a former member of the ICC Banking Commission, said[4]: “I am convinced that by removing the term ‘negotiation’ and ‘the right of recourse against the beneficiary’ [from UCP], we would make the letter of credit a more reliable instrument.”

But the fact remains that, in spite of these severe criticisms, negotiation is alive and well and is included in the latest version of the UCP. Since we must continue to live with it, this article is yet another attempt to explain the concept and to provide yet another answer.

UCP 600 definitions

......(contd.)

[This article is continued in the book 'Beyond Trade Finance', published on 13-Apr-2021 by Notion Press, and available at https://notionpress.com/read/beyond-trade-finance or at https://www.amazon.in/dp/1638508666]

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[1] Published in DC Insight, Vol. 16, No. 2, April-June 2010.

[2] DCInsight Vol. 10 No.4 Oct - Dec 2004.

[3] DCInsight Vol. 12 No.2 April - June 2006

[4] DCInsight Vol. 10 No.2 April - June 2004

[5] For a detailed comment on negotiation by this writer, refer to the article “Re-defining Negotiation”, LC Monitor – Trade Services Update, Volume 11, Issue 4, July–August 2009.

[6] ‘Suggested answer’ to question no. 2.15, Frequently Asked Questions on UCP 600, Gary Collyer.

Negotiation: The Concept

The problem with ‘negotiation’

In trade finance and documentary credit operations, the word ‘negotiation’ remains one of the most enduring enigmas of all times. No one describes the situation better, perhaps, than Ole Malmqvist, a member of the UCP Drafting Group for UCP 600 and one the most revered experts in the business. He said:

“.... there has been an extended discussion about the word negotiation, which nobody can define and which only a few want to get rid of.... I'm still looking for someone who can explain to me the difference between payment and negotiation .... so far no one has been able to come up with a definition, not one I have seen, at any rate, so I doubt that anyone will be able to come up with a definition now ....The word ‘negotiation’ is a problem.... I think we should get rid of the word ‘negotiation’ because we cannot define it and because we don't need the concept…. [1]

“…Every L/C expert knows exactly what negotiation is/means. But ask any three of them for their interpretation and be prepared to receive three different answers![2]”.

Reinhard Längerich says,[3] “I am convinced that by removing the term 'negotiation' and 'the right of recourse against the beneficiary' [from UCP], we would make the letter of credit a more reliable instrument.”

The fact remains that in spite of such sever criticisms, ‘negotiation’ is alive and well – ...... (continued...)

[This article is continued in the book 'Beyond Trade Finance', published on 13-Apr-2021 by Notion Press, and available at https://notionpress.com/read/beyond-trade-finance or at https://www.amazon.in/dp/1638508666]

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[1] DCInsight Vol. 10 No.4 Oct - Dec 2004.

[2] DCInsight Vol. 12 No.2 April - June 2006

[3] DCInsight Vol. 10 No.2 April - June 2004

[4] For a detailed comment on ‘negotiation’ by this writer, refer to article ‘Re-defining Negotiation’, LC Monitor – Trade Services Update, Volume 11, Issue 4, July–August 2009.

[5] ‘Suggested answer’ to question no. 2.15, Frequently Asked Questions on UCP 600, Gary Colleyer.

Making SWIFT changes

While browsing through the wide world of the web, I chanced upon several documents released by SWIFT over the last couple of years. One of the documents that I was happy to locate, and read from the first page to the last, was called “SWIFT Standards - Category 7 - Documentary Credits and Guarantees - For Standards MT November 2018-2019. Message Reference Guide. Advance information”. The document was dated 26 February 2016. Just what I’d love to preserve and have ready at hand on my computer. Of course, I read the document with considerable interest. My reaction, observations or suggestions, call it as you may, are based on this document and are as follows:

The first point I wish to draw the attention of SWIFT to, and my pet grouse, is .....(continued...)

[This article is continued in the book 'Beyond Trade Finance', published on 13-Apr-2021 by Notion Press, and available at https://notionpress.com/read/beyond-trade-finance or at https://www.amazon.in/dp/1638508666]

Non-documentary condition in LC and data-conflict

Conflict of data or ‘data conflict’ is a unique concept in the annals of documentary credit operations. It’s defined by sub-article 14(d) of UCP 600. Conflict of data has an annoying habit of sneaking in and trapping the unwary exporter or banker to upset the smooth flow of a transaction. One the one hand it concerns non-documentary conditions in a credit vis-à-vis the data in documents that form part of a presentation. On the other, it’s about inter-se consistency among the documents presented as also the credit The issue of data conflict under a non-documentary condition is addressed by Section A26 of ISBP 745 which states thus:

When a credit contains a condition without stipulating a document to indicate compliance therewith (“non-documentary condition”), compliance with such condition need not be evidenced on any stipulated document. However, data contained in a stipulated document are not to be in conflict with the non-documentary condition. For example, when a credit indicates “packing in wooden cases” without indicating that such data is to appear on any stipulated document, a statement in any stipulated document indicating a different type of packing is considered to be a conflict of data. (emphasis added)

Conflict of data as a concept still retains an aura of mystery in our minds. Hence the ISBP goes to great lengths to clarify this point about data-conflict. There are examples galore, of which only two are quoted below: .....(continued)

[This article is continued in the book 'Beyond Trade Finance', published on 13-Apr-2021 by Notion Press, and available at https://notionpress.com/read/beyond-trade-finance or at https://www.amazon.in/dp/1638508666]