Commission on Banking Technique and Practice - Case Study Example

Letter of Credit This brief deals with changes from UCP 400 to UCP 500 as regards articles 3, 4,6,13, and 14 of the latter version. Nowthat UCP 600 has come into force with effect from 2007, brief mention about it has also been made though main focus is on UCP 500. Some case law on doctrine of strict compliance in regard to return of documents has also been discussed. Article 3 Uniform Customs and Practices for Documentary Credits (UCP 500) replaced UCP 400 in January 1994. Article 3 of the UCP 500 is the combination of Articles 3 and 6 of UCP 400. UCP 500 states that a Letter of Credit has in its fold three contractual relationships of buyer and seller, buyer and issuing bank and the issuing bank and beneficiary. However the three contractual agreements are independent from one another. Thus the undertaking of a bank to honour the conditions under the credit such as acceptance, negotiation of bills or fulfilment any obligation cannot be entangled with the applicant of the L.C who can only deal with issuing bank or beneficiary separately.1 Article 4 This article envisages that all L/Cs shall deal with documents and not the goods, services or performances that are mentioned in the documents.2 Article 6 Unlike in UCP 400, Article 6 of UCP 500 does not mention if the L/C is revocable or irrevocable. This is in order to be consistent with commercial codes in other jurisdictions.3 Now under UCP 600, all credits are irrevocable unless otherwise stated.4 Article 13 This deals with the method of examination of documents. The article envisages that banks must examine the documents accompanying the L/C with reasonable care and ensure that the documents are on their face in compliance with the terms and conditions of the L/C. The compliance must be consistent with international standard banking practices. The bank’s responsibility of examining the documents is limited to the ones stipulated in the credit. As such, documents not mentioned can either be returned to the beneficiary or passed on without any comments. UCP 500 gives seven days for the banks to examine and decide whether to accept or refuse the documents. However, in the U.S. only three-days are allowed in most of the states. Further, an L/C with no documentary condition is not acceptable as per the article. Bank should disregard such conditions with no relation to documents.5 In fact, article 15 of UCP 400 has been substantially changed as Article 13 of UCP 500. This article has not taken care to prevent defensive L.C practices what are called spurious discrepancies under which banks reject payments.6 Article 14 Whenever documents are received, it is the duty of the bank to inform the presenter whether all the documents are on their face, in compliance with the terms and conditions of the L/C. Any nominated bank acting on behalf of the issuing or confirming bank must notify the presenter that it shall refuse the documents for negotiation if the deficiencies are not rectified within seven days following the day on which documents were received.7 The steps that should be taken by banks in the examination are stated in the chart below in annexure 1.8 After the UCP 600, it has been changed to five days for either making payments or rejecting from the date of presentation of documents. The wordings ‘reasonable time” and “without delay” have been removed. 9 Articles 13 and 14 must be dealt with together for sufficient understanding of the process of examination of documents and notifying discrepancies and deciding to seek waiver of the same from the applicant. As mentioned in the Annexure 1, following steps are involved. International standard banking practice applicable for examination must be adopted for examining all documents mentioned in the credit to verify whether they, on their face, comply with the terms and conditions of the credit. As already said, the documents not mentioned but accompanying the credit will not be examined and either returned to the presenter or passed on without any commitment. Secondly, the banks involved namely the Issuing Bank, the Confirming Bank and any Nominated bank shall each take not more than seven days to accept or refuse the documents and inform the parties from whom they have received accordingly. As already said, those conditions without relation to any documents shall be disregarded by the banks.10 When dealing with discrepant documents and notice regarding them as per Article 14, the Issuing Bank or the Confirming Bank shall reimburse the Nominated Bank which has paid or incurred a commitment and take up the documents if they had authorised the said banks to pay or make commitment to pay the documents which on their face are in compliance with the terms and conditions of the credit. And on receiving the documents, the said banks must determine solely on the basis of the documents whether or not they on their face comply with the terms and conditions of the credit. If not, the said banks may decline to accept the documents. If the issuing bank finds that the documents do not comply, it can ask the Applicant to make a waiver of the discrepancies but within the time prescribed as per article 13(b). If the documents are to be refused, the concerned banks must give notice by telecommunication or any other faster means but within the seven days following the day of receipt of documents stating all the discrepancies and whether they are being retained or returned. The issuing bank or confirming bank then becomes entitled to a refund with interest from the remitting bank any reimbursement of payment made. If there is failure on the part of Issuing bank or confirming bank in complying with the article, it shall be precluded from stating that the documents are not in compliance. If the remitting bank advises that it has paid or made a deferred payment undertaking under reserve or against an indemnity, the issuing bank or confirming bank shall not be relieved of their obligations under this article. Doctrine of strict compliance Banks are bound by the doctrine of strict compliance since early days of UCP. Practice. The issuing bank and /or correspondent bank decide on the basis of the documents even if they on their face appear to comply. Thus, the bank need not enquire into discrepancy or ambiguities and it can simply reject the documents in keeping with the strict compliance rule established in English law in 1927 in the matter of Equitable Trust Co of New York vs Dawson Partner11 It was observed in this decision that there could be no lenience assuming that the documents are almost the same or just that there could be no harm in accepting such documents. An American decision in Fidelity National Bank v Dade County12 stated “Compliance with the terms of a letter of credit is not like pitching horseshoes. No points are awarded for being close”13 In a classic case JH Rayner & Co ltd v Hambro’s Bank Ltd14, the description in the letter of credit was ‘Coromandel groundnuts’ but the seller’s invoice mentioned it as ‘machine-shelled kernels’ Hence the bank was entitled to reject the invoice and refuse payment although it was a common knowledge that both the terms meant the same. The reasoning was that bankers cannot be expected to possess knowledge of the customs prevailing in thousands of trades for which they may issue letters of credit. A recent 1993 decision in Seaconsar Far East v Bank Markazi Jomhouri Islami Iran 15 involved an agreement to sell a large quantity of artillery shells to the Iranian Ministry of Defence for US$ 193 m against letter of credit. One of the conditions to the credit was that all the documents presented to bank must contain the credit number and buyer’s name. But one of the documents presented did not have the number and name of the buyer. Though it was argued that the omission was of trivial nature, Lloyd LJ stated that there could be no such complacency when the letter of credit specifically requires some thing else. He also quoted the example of Bankers Trust Co v State Bank of India16 wherein one of the documents carried a wrong fax number as 931310 instead of 981310 for showing lenience especially because there was no condition as such stipulated in the letter of credit. Besides, one deficiency could not be cured by reference to other documents of the same letter of credit. Article 14(b) of UCP 500 states that banks may refuse to take the documents if not in compliance with the credit stipulations. The word “may” which suggests some degree of discretion of the bankers can help banks avoid liability if they accept such discrepancies after making sure of the genuineness by referring to other connected documents.17 The list of such discrepancies and court decisions supporting the banks’ rejection is endless Conclusion The UCP 400 has now transformed in to UCP 600 through UCP 500. Features of UCP 500 remain unchanged except for giving effect to requirements of electronic commerce and to reduce certain ambiguities. References Journals Chan Felix W H, (1999) Documentary Compliance Under UCP: A Fault Finding Mission Or A Mere Guessing Exercise? Law Lectures for Practitioners, p 60-77 Herula Donald and Powell Robert, 1993, Revisions Lie Ahead for L/C Transactions, Business Credit, 95(7) Others Arensberg Tucker, 2007. The New UCP 600: changes from UCP 500 Coming soon, the UCP revision. Trade Forfaiting Review, April 2004 Volume 7 (6) Ibid item 1 supra ICC, Discrepant Documents, Waiver and Notice, Commission on Banking Technique and Practice, Department of Policy and Business Practices, International Chamber of Commerce. Cases Bankers Trust Co v State Bank of India (1991) 2 Lloyd’s Rep 443 Equitable Trust Co of new York vs Dawson Partner (1927) 27 Lloyd’s Rep 49 Fidelity National Bank v Dade County 371 So2d 545 JH Rayner & Co ltd v Hambro’s Bank Ltd (1943) KB 37 Seaconsar Far East v Bank Markazi Jomhouri Islami Iran (1993) 1 Lloyd’s Rep 236 Annexure Read More