The Road Map to a Draft-less UCP [1]
Rupnarayan
Bose[2]
“Anything can be achieved in small, deliberate
steps. But there are times you need the courage to take a great leap; you can't
cross a chasm in two small jumps.” [David Lloyd George]
For the International Chamber of Commerce (ICC), the bill of
exchange (BoE) – also called a draft – has been a stumbling block for a long
time. Try as one might, the many complications that drafts present to the users
of the UCP rules are yet to be resolved in a satisfactory manner. Some trade
finance specialists opined that the draft was not a ‘document’ for purposes of
examination under a letter of credit subject to UCP600. Other practitioners felt
that a draft did not provide any benefit to LC operations. A segment of the
trade finance community expressed discomfort at the very mention of ‘draft’. The
ICC has neither accepted the draft as a standard requirement, nor have they been
successful in casting it out from LC practice. The bill of exchange continues
to baffle many in the trade finance industry to this day, presumably because
the laws governing bills of exchange in various countries have not been
understood well enough by a section of the trade professionals. This article is
an attempt to resolve the confusion and place bills of exchange laws and the
UCP in their proper perspectives.
Bill of Exchange
The bill of exchange (BoE) is a product of the United
Kingdom’s Bills of Exchange Act and other similar laws promulgated around the
world based on the UK Act.[3] Section
3 of the Bills of Exchange Act 1882 (UK) defines a bill of exchange (a negotiable
instrument):
“A bill of exchange is an unconditional order in writing, addressed by one
person to another, signed by the person giving it, requiring the person to whom
it is addressed to pay on demand or at a fixed or determinable future time a
sum certain in money to or to the order of a specified person, or to bearer.“
Note the words ‘unconditional order’ and ‘to pay ... at … a
determinable future time’. The drawee must pay irrespective of any reason that they
may think they have to delay or avoid payment. The obligation does not call for
the presentment of any circumstantial evidence to establish the right of the
holder to receive payment at maturity.
The Act goes on to define a drawer, drawee, payee, transfer,
holder for value, holder in good faith, special and general endorsements and so
on. These are integral to, and defined by, the BoE Act. The requirement and the
process of ‘noting and protesting’ – present in almost all the enactments – are
also broadly similar.
A unique feature of the negotiable instrument is that if a person acquires a ‘negotiable
instrument’ in good faith and without knowledge of defect in title of the
transferor, the transferee can get better title to the negotiable instrument,
even if the title of the transferor was defective. (However, a similar status
is not accorded to a bill of lading, for instance. A B/L is not a
negotiable instrument but rather a quasi-negotiable instrument. The transferee does not get a better title than the one who
transferred it by endorsement and delivery,)
Differences in the Acts
Although various enactments on negotiable instruments around
the world bear a great degree of similarity, differences exist, especially with
reference to the amount in words and figures. In certain jurisdictions, where
there is an inconsistency between the two, the lesser of the amounts prevails.
In some countries where there is a mismatch, the amount stated in words prevails.
However, according to Negotiable Instruments Law of the People's Republic
of China[4],
“The amount of a
negotiable instrument shall be written in both Chinese characters and in
numerals and the two shall tally
with each other. The negotiable instruments shall be invalid if the words and
figures do not tally.” (Article 8)
Article 9 of the same Law of China states: “The items recorded in a
negotiable instrument shall conform to the provisions of this law. The amount,
date and name of the receiver shall not be altered. If they are altered, the
negotiable instrument shall become invalid. Other matters recorded in a
negotiable instrument may be altered by the original recorder and the
alteration shall be certified by a signature or seal put on it by the original
recorder.”
These Articles are quoted to show that first, the laws on
the negotiable instruments are the province of the lawmakers of the country
concerned; and second, that there is no uniformity among the enactments on this
subject among the countries around the world.
Where the laws themselves are not uniform, their
implementation could be even more problematic. For example, ISBP 821 paragraph
B15 states: “A draft is to be endorsed, if
necessary”. Who is to determine when this is necessary and with
reference to, or based on, what? To comply with ISBP 821 paragraphs B16 and B17 that follow,
one would also have to be aware of the relevant provisions in various
jurisdictions worldwide. Is it practical to expect this from a document
checker?
Further,
ISBP 821 paragraph A11(i) states that “drafts
are to indicate a date of issuance”. However, UK Act section 3.4.a and
BoE laws of several countries state: “A bill is not invalid by reason [T]hat it is not
dated” (or like wording). Can the ISBP, a supplement explaining the UCP rules, prevail
over BoE law?
Given
this scenario – especially the lack of uniformity in the laws – it would be
advisable for the ISBP to avoid commenting on drafts.
1.
The critical advantage of a BoE
Performance under a letter of credit is a contractual
obligation.[5]
In order to establish its claim, an aggrieved party need to go through the arduous
process of presenting circumstantial evidence to prove to a court that (a)
there was an agreement or contract to supply certain goods; (b) that supply was
duly made and received by the parties concerned to their satisfaction; (c) that
payment from the buyer was as scheduled (on demand or at maturity), and (d)
that the buyer failed to pay as previously agreed.
By law, the very possession of a duly accepted but unpaid
bill of exchange is sufficient evidence to establish the liability or
obligation of the buyer to pay a holder. Thus:
“[w]hen a holder in due course is
established, this holder is not obliged to provide evidence of the actual basis
to claim for the payment of the bills of exchange. Other parties who assume the
debt to be defended against a holder in due course are not allowed on a basis
of underlying cause.”[6]
This makes transactions between a buyer and seller under the
BoE laws quite straightforward. The role of bills of exchange and the rights of
a holder in a transaction are clearly established by law. This is irrespective
of whether the transaction is further supported by a documentary credit or not.
2.
The applicable rule or law?
As already clarified, negotiable instruments like bills of
exchange (drafts) are governed by Bills of Exchange law. Letters of credit, on
the other hand, are governed not by any legislation but by the rules created by
the ICC. Unlike the laws governing bills of exchange, which are applicable and
enforceable whether one is aware of them or not (‘ignorantia juris non excusat’),
parties would have to specifically agree to abide by the UCP rules for these to
be applicable. Unlike positive law, private rules of practice are applicable
only to the extent of which they have been chosen and to which the applicable
law gives effect to them.
3.
LC - Sailing in two boats
The presence of a draft among a set of documents presented
under a letter of credit creates an immediate conflict. The draft, a negotiable
instrument, is an unconditional order to pay the holder at sight or on
maturity. Payment under an LC, on the other hand, is conditional, subject to a complying
presentation and the UCP rules. Further, under the fraud exception, the issuing
bank may obtain judicial relief and not pay. However, under a BoE Act, the
issuing bank is still obliged to pay the holder in due course who has no idea
that a fraud may have occurred. The dilemma for the issuing bank begins
here, because bills of exchange are governed by legislative approval. Legislation
supersedes rules at all times.
“When LC requires bills of
exchange, there are two types of legal relationships among the issuing bank,
the nominated bank and the beneficiary under the LC and the bills of exchange,
which are not completely the same. The judicial practices in the LC
transactions and the bills of exchange operations are different. The
examination standards for the bills of exchange by international standard
banking practice … in LC operations such as amounts & corrections are not
consistent with relevant provisions of the laws for the bills of exchange,
particularly on the regulated format and the contents under various legal
jurisdictions”[7]
Therein lies the rub. To start with, it is recommended that
draft be removed from LCs available by sight payment. Let such LCs be called: (a)
credits available by immediate payment; (b) credits available by payment on
demand; or (c) demand credits (these terms being defined by the UCP). In the
absence of a draft, ‘LCs available at sight’ (of a draft) does not make sense.
That expression could be simultaneously removed.
4.
The BoE Act
The fact is that the vast majority of LC specialists do not
understand the finer points of the BoE Act, if they have studied the subject at
all. A majority of them do not understand, for example, the difference between
a negotiable instrument like a draft or cheque, and a quasi-negotiable
instrument like a bill of lading. Many professionals in the industry calling
for the end of drafts lack the expertise to comment on the laws applicable to
bill of exchange, their relevance (if not their utility) in documentary credit
operations, or why LCs and drafts do not mix. This environment prompted the ICC
in 2023 to issue its document titled “Additional material relating to the
Guidance Paper – the use of drafts under documentary credits prepared by the
Executive Committee of the ICC Banking Commission”, a re-release of its 2019
Guidance Paper which opened with the comment: “Market feedback from a number of
trade practitioners questioned the on-going requirement for drafts in a documentary
credit transaction. Furthermore, it was stated that sight drafts do not provide
any benefit.”[8]
Fact or fiction? Read on to find out.
Most unfortunately for the ICC, ever since the UCP rules
were framed, documentary credits and drafts became inexorably linked. Consequently,
the present UCP600 Article 6 describes four types of documentary credits, two
of which may or may not require the presence of drafts. The fact that the UCP
fails to offer clear definitions for these types of documentary credits is
simply because drafts are defined by the BoE Act, not the ICC.
5.
Supremacy of the BoE
Letters of credit are subject to rules framed by the ICC whereas bills of exchange (drafts) are governed
by laws under a country’s bills of exchange act.
“The laws and judicial practice for
bills of exchange have clear requirements which can clarify easily the rights
and obligations of a holder in due course and a holder for value. For example,
when a holder in due course is established, this holder is not obliged to
provide evidence of the actual basis to claim for the payment of the bills of
exchange……
The protection for a holder in due
course, by applying the laws for bills of exchange for the non-causal nature
prevails over independence principle in LCs under UCP600. Other disputes
arising from bills of exchange in a LC transaction, the court [is] also very
likely to apply the relevant bills of exchange ordinance instead of LC
regulations and law, [from] which could occur uncertainties to the issuing
bank, the nominated bank as well as the beneficiary.”[9]
The significance of these observations should not be overlooked.
6.
The use of BoEs
Is a draft essential to export documentation? For documents
under collection (collection bills), it is not only necessary but essential. The
applicable rules are elucidated in Uniform Rules for Collections (URC), ICC Publication
No. 522. The set of collection documents primarily includes an invoice, a
transport document, and other documents like a certificate of quality/health
and packing list as the case may be. A draft – drawn by the seller (drawer) on
the buyer (drawee) and showing the seller’s bank as the payee – sits on top of
this neat little pile of documents. Why?
The full set of documents is submitted by the seller to their
bank with instructions for onward transmission to the collecting/presenting
bank for presentation to the buyer. The buyer is required to pay the presenting
bank at sight or accept and pay at maturity. Now ask yourself: If someone turned
up at the buyer’s place of business with the aforementioned bundle of documents
(without the draft) and demanded payment, which of these documents would give the
presenter any authority to (a) demand payment on behalf of the seller; (b)
receive payment on behalf of the seller; and (c) give a legal discharge on
behalf of the seller for having received full and final payment, thus releasing
the buyer of their obligation towards the seller?
None, actually. The documents are mere pieces of paper,
possibly drawn to show the buyer as the addressee. However, none accords any legal
right to the presenter to demand payment. Only the bill of exchange does
by the force of law, which the seller submits along with other documents to their
bank (the remitting bank), denoting that bank as the payee on the BoE. The
seller issues the bill of exchange showing the remitting bank as the payee. The
remitting bank endorses the draft in favour of the collecting/presenting bank.
The collecting/presenting bank, having received the bill of exchange by the due
process of transfer by ‘endorsement and delivery’ (as defined by the BoE Act), becomes
its ‘holder in due course’ (once again, as defined by the BoE Act). Note the
unbroken chain. The presenting bank is thus empowered by law to do all
that is required under points (a) to (c) in the foregoing paragraph.
7.
Endorsement
Let us examine a variation of the above. In this scenario,
the seller endorses the BoE (attached to the other documents covering the
shipment) directly in favour of the presenting bank. When the transaction is
under a letter of credit, it would be the issuing bank. The set of documents
along with the bill of exchange (where the issuing bank is recorded as the
payee) is handed over by the beneficiary to the nominated bank for negotiation.
The nominated bank forwards the documents to the issuing bank. Question: Before
submitting the documents, should the beneficiary endorse the draft in favour of
the nominated/negotiating bank?
The answer is that the draft was “issued” (see its meaning in the BoE Act) in favour of the LC issuing
bank and handed over to the nominated bank only for “due delivery” (delivery as
defined by the BoE Act) to the issuing bank. It was not endorsed in favour of
the nominated bank. Therefore, it cannot pass on what it does not have. No
further endorsement is necessary. The issuing bank becomes the holder in due
course. The chain remains unbroken. Yes, one needs to know the BoE Act to fully
appreciate how the law works.
8.
What is deferred payment?
‘Payment at sight or sight payment’ and ‘acceptance’ are
products of the BoE Act, which defines these terms. The UCP has not offered any
definition for these two expressions. The term ‘deferred payment’ is not
defined by the BoE acts, nor by the UCP. According to the ICC, ‘payment by
acceptance’ and ‘deferred payment’ are similar – not being payable on demand –
but for the absence of drafts in the latter (see ISBP 821 paragraph B6). This
impression is wholly incorrect.
Under acceptance credits, the total face value (amount due)
is paid in a lump sum within six months to a year, but after a mutually agreed
period. Under a deferred payment arrangement, the repayment begins after a moratorium, but is
spread over several instalments. Examples are vehicle loans, student loans, or
a mortgage.
Consider a project like construction of a power plant, port,
railroad, or highway where the investment is a massive amount. Project
implementation takes many years. Repayment of the amount borrowed cannot begin
until and unless the project is commissioned and starts generating revenue,
which may take several more years – dictated by the nature of the project and
the terms of the loan agreement. Repayment begins after a gap of time
(moratorium) and paid in instalments spread over a decade or more depending on
the cash flow. This is known as a deferred payment arrangement.
Suitably worded contracts, bills of exchange, letters of
credit – or a combination of all three – are used (subject to the matter of
stamp duty in some countries) to bind the borrower and ensure repayment over the
“deferred” period. Where the advance is covered by LC, it is called deferred
payment credit.
9.
Securing Payment with Draft
Where LCs are not used, drafts are a secure mode for ensuring
repayment. For projects extending over ten to fifteen years or more, drafts are
prepared in advance for amounts synchronised with the due dates of the agreed instalments,
all signed by the borrower in token of acceptance, and preserved by the lender.
On the respective due date, the relevant draft is presented to the borrower, the
scheduled instalment payment received, the draft discharged, dated, and handed
over to the borrower in acknowledgment. The process is repeated until the last
instalment is paid.
Based on present definition, letters of credit available by
deferred payment do not envisage the concurrent use of bills of exchange.
However, integration of bills of exchange into deferred payment credits could
add considerable value in terms of security of repayment. Apart from the
commitment under a letter of credit, an added protection would be afforded by
the presence of the accepted but unpaid bill of exchange. One may argue that
since the deferred payment transaction is under a letter of credit, the lender
has protection by virtue of the presence of an LC.
However, establishment of claim, incidence of default, and
breach of contract are long-winded affairs under any letter of credit. For the
holder in due course, the presence of an accepted but unpaid bill of exchange
can reduce the process considerably for reasons already stated. Further, when
no LC is used in a deferred payment arrangement, what then? How is the lender
supposed to be protected? Think drafts, think unconditional payment.
From a risk management point of view, an accepted draft in
hand may be better than a deferred payment credit which is subject to the availability,
capacity, and capability of the issuing bank to honour its commitment over the
extended period.
10. LCs
Available by Acceptance
There is no conflict per se between the BoE laws on usance
drafts and LCs available by acceptance. In both instances, a time draft is
required. In the absence of clear direction in the UCP, the recovery process is
set forth in the BoE Act for accepted drafts remaining unpaid at maturity. In
both instances the amounts due are payable immediately on maturity.
However, it would be ridiculous to draw acceptance drafts on
the issuing bank. Firstly, because after acceptance, the draft in most cases is
not returned to the nominated bank but continues to be held by the drawee
(issuing) bank itself. If it is to be used by the seller or their (financing)
bank as evidence of non-payment on maturity, and the party to be sued is the issuing
bank that originally accepted (and held) the bill of exchange, the whole
scenario would be self-defeating in nature. The LC is an obligation of the
issuing bank. The UCP rules and ISBP standards are well equipped to sort
matters out in case of any difference of opinion (including refusal to pay) between
the negotiating bank and the issuing bank. The simultaneous presence of a draft
– one which calls for immediate payment (or on maturity) come what may – only
muddies the scenario.
In the final analysis, the party in default should be the
buyer/applicant – not the issuing bank that has anyway undertaken to pay under
an LC on behalf of its client, the applicant. Making the issuing bank bind
itself twice under two entirely different sets of rules and laws for the same transaction,
instead of binding the buyer/applicant, makes no practical sense. Where exists a
draft drawn on and accepted by the buyer/applicant, the drawer or holder can
use all the forces of the BoE Act for recovery of money unpaid.
In LC transactions drafts should never be drawn on the
issuing bank for acceptance. As explained earlier, it would place the issuing
bank under the dual control of the UCP rules and also that of the laws
governing bills of exchange. It is wise not to sail on two boats.
Hence, LCs available by acceptance of drafts on the
issuing bank must go. UCP600 Article 6(c) should be modified accordingly. For
usance transactions, time drafts should be drawn on the applicant (Swift Fields
42.A and 42.C). It would be the duty of the issuing bank to obtain acceptance
and hold the same until maturity and final payment. Call it ‘LC available by
delayed payment’, ‘Usance LC’, ‘Time LC’ or any other appropriate name.
A word of caution: The documentary credit community freely
uses expressions such as acceptance, endorsement, at sight, after sight, and at
maturity, without fully appreciating the fact that the UCP defines none of
them; these terms are only defined in the Bills of Exchange Act.
11. Is
Draft Not a Document?
ICC Opinion TA.853rev (2016) states that: “A draft is an unconditional order in writing
and not a document”. Is a draft
written on sand, on water, or in thin air? Since “Banks deal with documents and
not with goods, services or performance … .” (UCP600 Article 5), why then is
draft included in documentary credit operations at all if it is not a document?
Why is it called for in a documentary credit? ICC’s assertion about drafts seems
absolutely illogical. Further, why, “If certain information is to appear
on a draft, it must be specifically stated in the credit” (ICC Opinion
TA.853rev)? That is what an LC does anyway by stipulating that “all documents must
… .” How to reconcile the ICC Opinion TA.853rev conclusion with the
UCP600 rules? What is the logic for making an exception in the case of drafts
alone? None whatsoever, in my opinion.
How does one define an acceptance credit or a sight
credit without reference to the underlying bill of exchange as the reference
document?
The ICC has spent considerable time and energy explaining the
irrelevance of drafts in trade finance operations. In January 2019 as part of a
“Set of Guidance Papers on Recommended Principles and Usages around UCP 600
Rules”, the ICC produced a 13-page paper titled “Additional Material Relating
to the Guidance Paper - the Use of Drafts under Documentary Credits”. Concurrently,
ICC also released an abbreviated “Executive summary” on the topic claiming that:
“[A] number of ICC National Committees and practitioners questioned whether
drafts should be required for presentation under any documentary credit.
Furthermore, it was highlighted that sight drafts do not provide any benefit to
a nominated bank or issuing bank.” I suspect that the respondents did not study
or analyse the BoE Act closely enough.
I hope that this essay on the Bills of Exchange Act helps in
improving understanding of the role of drafts in documentary credit operations.
12. An
Analysis of ICC Findings and Positions
Before closing, it may be in order to review and comment on a
few past ICC findings, positions it has taken, and a possible future direction.
1)
“However, it was clearly apparent from responses
that a lack of understanding did exist in respect of the application and
practice of UCP 600 within both banks and corporates.” (“Decision of the ICC in
respect of a revision of UCP 600 following a comprehensive consultation”, 15
June 2017, ICC Document 470/1272.)
Spot on. I could not agree more. Yet
strangely, the last portion of ICC’s paper on “Notes on the Principle of
Strict Compliance, Issues Paper”
(Document No. 470/1261) states
that “as time goes by, it is customs and practice that will provide the
required clarity. And once such customs and practice have become commonplace,
they will form part of a future revision of ISBP.”
Should not the ICC lead the way
rather than play catch-up? The ISBP are not rules! Whatever happened to revision
of the UCP rules, the backbone of documentary credit operations? (Current
version issued way back on 1 July 2007), Should not it be revised first? Real
change will not come through tinkering with the ISBP standards from time to
time.
2) UCP600
Article 15 is weak in the sense that it provides no direction to banks to
forward documents “without delay” or within “reasonable time”. Of course these parameters
are determined by circumstances, but would not a moral suasion come in handy if
and when disputes arise?[10]
Sub-section 76.1 of Canada’s Bills
of Exchange Act,[11]
states, “… when a bill payable at sight or after sight is negotiated, the
holder must either present it for acceptance or negotiate it within a
reasonable time.” Section 76(2) states: “If the holder does not comply with the
requirement of subsection (1), the drawer and all endorsers prior to that
holder are discharged.” Now replace “holder” in the preceding quote with
“nominated or negotiating bank” and re-read section 76(2) with this
substitution.
3) ICC
Opinion R256 (1997) concludes by stating: “Any dispute as to the requirement and manner of
“physical” acceptance is
between the importer and the issuing bank based upon local banking practices
and law.” Banking
laws are centrally regulated and are applicable to a country as a whole.
Qualifying them as “local” is incorrect if not mischievous.
4) The
matter of
communicating acceptance could also have been easily sorted out if the ICC had
referred to and clarified the laws on BoE in its response.
The relevant portion of the BoE
Act 1882 (UK) Section 17 states as follows:
“17 Definition and requisites of acceptance.
(1) The acceptance of a bill is the signification by the drawee of his assent to the order of the drawer.(2) An acceptance is invalid unless it complies with the following conditions, namely:(a) It must be written on the bill and be signed by the drawee. (Emphasis added)The mere signature of the drawee without additional words is sufficient.“ ....
SWIFT MT754 is for advising payment,
acceptance, or negotiation. It does not convey or confirm that a draft has been
physically accepted in accordance with the applicable law. Why couldn’t these
extracts from the BoE Act be highlighted to clear the air?
5) Two
past ICC Opinions issued under UCP500 seem particularly problematic.
(a)
ICC Opinion TA480rev states:
“[I]t is recognized that where
sight drafts are to be drawn on the issuing bank, the requirement for the
presentation of such draft is often crucial for the issuing bank to obtain
payment from the applicant.”
Comment: Where the sight draft is
drawn on the issuing bank, it becomes the drawee. Consequently, under the BoE
Act, the drawee (the issuing bank) is obliged to pay at sight or
on demand, not the applicant which is not a party to the draft. Hence,
the remark, “such draft is often crucial for the issuing bank to obtain payment
from the applicant” is misplaced and irrelevant.
(b)
ICC Opinion R205 states:
“If an issuing bank insists on
issuing a credit calling for drafts on the applicant, such drafts will be considered
as an additional document. This means that the draft on the applicant will be construed
as being an “accommodating draft” for the use by the issuing bank and not as
the “instrument” that would control payment obligations of the issuing bank
under the documentary credit. It will not be treated as the primary bill of
exchange demanding payment or acceptance, but just as any other document for
accommodation by the issuing bank in its relationship with the applicant
outside the documentary credit mandate.”
The BoE Act (UK) Section 28 defines ‘accommodation bill or
party’. However, nowhere in this Act or those enacted by other countries
reviewed, is there an expression called “accommodating draft”. What is the origin
of this term?
ICC Opinion R205 also states that an “(accommodating
draft) will not be treated as the primary bill of exchange.” Under which
section of the law? Further, “the draft on the applicant will be construed as
being an “accommodating draft” …. but just as any other document for
accommodation …”. Once again, based on which section of the applicable law is
this being stipulated? Can a draft ever be just “any other document for
accommodation” even when drawn in accordance with Bills of Exchange law?
If in accordance with this article time drafts are allowed
to be drawn only on the applicant (buyer), the areas of confusion are likely to
disappear.
13. Action
Points for ICC
While advocating for
a complete rewriting of UCP600 to make it less complicated for users
worldwide, I offer these specific suggestions:
a)
UCP600 Article 2: Restructure item (c) under the
definition of ‘honour’;
b)
UCP600 Article 2: Re-define ‘Negotiation’ to
mean giving of value (payment of money) under a mandate by a third party.
Purchase or discount, consequently, will mean giving of value under the sole
discretion and judgment of the bank (financing institution) parting with funds.
c)
UCP600 Article 2: Add definitions for ‘deferred
payment’, and ‘deferred payment credit’;
d)
UCP600 Article 2: Remove references to ‘draft’
and ‘agreeing to advance funds’[12];
e)
UCP600 Article 6(b): Remove ‘sight payment’ and
‘acceptance’;
f)
UCP600 Article 7(a): Remove all references to ‘sight
payment’ and ‘acceptance’;
g)
UCP600 Article 7(a)(i): Delete ‘sight payment
and ‘acceptance’. Replace with ‘honour’;
h)
UCP600 Article 7(a)(ii): Replace ‘sight payment’
with ‘negotiation’;
i)
UCP600 Article 7(iv): Delete;
j)
UCP600 Article 8: Similar action points as
suggested for Article 7;
k)
UCP600 Article 12(b): Delete.[13]
l)
UCP600 Article 14(g): Revise and expand wording
of sub-Article to state: “A document presented but not required by the credit
will be summarily disregarded and will be returned to the
presenter without further examination of the document as per the provisions
of the UCP or any action for documents required by the credit. This rule also
applies to drafts drawn on the issuing bank, confirming bank or the nominated
bank.”
m)
UCP600 Article 15: Insert ‘without delay’ at the
end of each of the three sub-articles.
n)
Remove all references to drafts from the ISBP
for reasons already explained. Drafts are not subject to any rule or “local
banking practices”, but are governed by legislations.
14. Benefits
In my view, implementation of these suggestions will:
- Remove all confusion about the usage of drafts;
- Make ‘negotiation’ easier to understand;
- Remove the confusion between ‘available by payment’ and ‘available by negotiation’;
- Relieve the documentary credit of the baggage (dual authority) carried by it for so long, resulting in legal simplification;
- Remove many chokepoints by simplifying and streamlining the UCP and the ISBP.
This article brings the horse to the water. The big question
now is, will the horse drink? Let us hope that it does.
A word of caution:
The UCP should be fully revised before any attempt is
made to revise the ISBP. Doing the opposite will be an exercise in futility.
The tail cannot wag the dog.
+++++
While
introducing my article "The road map to draft-free UCP" published in
the May 2025 issue of Documentary Credit World (DCW), Chris Sandler[14] remarked thus:
“Despite decades of tension between
drafts and documentary credits, the ICC has yet to fully untangle the bill of
exchange from UCP rules. In this meticulous article, Rupnarayan Bose outlines
the legal supremacy of BoE law over ICC practice, the operational confusion
that results, and the hazards of forcing banks to “sail in two boats.” From
defining sight and deferred payment to dissecting ICC Opinions and their
logical gaps, Bose makes the case for an overdue course correction: cut drafts
from UCP600 and update the rules for the realities of modern finance.”
Very succinctly put. Yes, this article offers solutions to
several tricky issues that the ICC had been grappling with for decades. The
article follows.
Trivia: It took me
about 5+ months of continuous work on it to put together my thoughts on the
subject the way I wanted to.
++++
[1]
First
published in Documentary Credit World issue of May 2025. https://www.doccredit.world/the-road-map-to-a-draft-less-ucp/?ref=dcw-monthly-newsletter
[2] © author. Contact: rnbose@gmail.com; LinkedIn: linkedin.com/in/rupnarayan-bose-03163b5b
[3] Other jurisdictions
with law similar to the UK Act include, but are not limited to, Canada (Bills
of Exchange Act 1985), Ireland (Bills of Exchange Act 1882), Kenya (Bills of
Exchange Act), Australia (Bills of Exchange Act 1909), and Abu
Dhabi (Bills of Exchange Act 1882, updated Dec 2020).
[4]
http://www.pbc.gov.cn/en/3688253/3689003/3709973/index.html
[5]
Refer to my
article ‘Some random thoughts on the UCP’, Chapter 1, Beyond Trade Finance,
Notion Press, 2021
[6] Zhongmin, Zha. 2023. “Bills of exchange in a letter of
credit”. Vestnik of Saint Petersburg, University. Law 2: 531–541.
https://doi.org/10.21638/spbu14.2023.216
[7] Zhongmin, Zha. 2023. “Bills
of exchange in a letter of credit”. Vestnik of Saint Petersburg University.
Law 2: 531–541. https://doi.org/10.21638/spbu14.2023.216
[8] Quoted in the Guidance Paper’s “Introduction”, page
24, Set of Guidance Papers on Recommended Principles and Usages around UCP
600 Rules.
[9] Source: Zhongmin, Zha. 2023. “Bills of exchange in
a letter of credit”. Vestnik of Saint Petersburg University. Law 2:
531–541. https://doi.org/10.21638/spbu14.2023.216
[10] This flaw was pointed out in “Wanted: a more positive
article 15”, chapter 18 of the book “Beyond trade finance”, Notion Press, 2021.
[11]
https://laws-lois.justice.gc.ca/eng/acts/b-4/page-1.html
[12] To
know more, refer to articles on ‘negotiation’ in the book ‘Beyond trade
finance’, Rupnarayan Bose, Notion Press, or Amazon websites.
[13] For an explanation, refer to ‘Prepayment, honour and
bills of exchange’, chapter 11, ‘Beyond Trade Finance’, Notion Press,
2021;
[14]
Chris Sandler is the COO
of the Institute of International Banking Law & Practice (IIBLP), the
organization which produces DCW.
