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UCP 600 Learn the New Rules to Avoid Litigation and Nonpayment

By Donald R. Smith Reprinted with Permission from the December 2006 Issue of IOMAs Managing Exports and Imports Donald R. Smith is vice president of client services for Norman Technologies, a Charlotte, NC-based technology-consulting firm. He serves as chairman of the Banking Committee of the United States Council for International Business and, in that capacity, represents the United States to the ICC Banking Commission. Recently retired from Citibank NA as vice president of global trade finance product management, Mr. Smith is a frequent speaker and also serves as an expert witness. The opinions expressed herein are those of the author.

Important changes to the internationally recognized rules for letters of credit, UCP 600, have an effective date of July 1, 2007less than a year away! This article focuses on key specific implications of the new rules. The bottom line is that an unsuspecting beneficiary of a letter of credit (LC) can still have a heated disagreement, and perhaps become involved in undesirable and unnecessary litigation, if he or she is unaware of the impact an amendment has on iteven one he or she has not received. While the UCP is not law, if the LC makes itself subject to the UCP 600, this set of rules is incorporated into the LC and the parties have agreed to be bound by them. Why is that important? Because an LC exists to ensure payment to the beneficiary (the seller). If the seller fails to understand the rules that determine whether his or her documents comply, the entire payment is put at riskafter the merchandise has been shipped! Amendment Revision Language While people like to focus on critical changes, sometimes the more important articles are those that have not changed. For example, consider an amendment to an LC. Imagine you are a beneficiary of a $100,000 credit that permits four-part shipments of $25,000 each. You manufacture and ship the first $25,000 of merchandise and begin to ship the second shipment when you receive payment for the first and a notice that the credit has been fully drawn and is no longer available in accordance with Amendment #1, which you never received, reducing the credit to $25,000 and stating part shipments are not permitted. How can that be? Lets look at the revision. By definition in UCP 600 Article 2, an LC (a credit): means any arrangement, however named or described, that is irrevocable and thereby constitutes a definite undertaking of the issuing bank to honor a complying presentation. (My italics for emphasis here and in following quotations.) In UCP 600 Article 3, a credit is irrevocable even if there is no indication to that effect. And in UCP 600 Article 7(b), an issuing bank is irrevocably bound to honor as of the time it issues the credit. Finally, UCP 600 Article 10, which deals extensively with amendments: a. Except as otherwise provided by article 38, a credit can neither be amended nor cancelled without the agreement of the issuing bank, the confirming bank, if any, and the beneficiary. b. An issuing bank is irrevocably bound by an amendment as of the time it issues the amendment. A confirming bank may extend its confirmation to an amendment and will be irrevocably bound as of the time it advises the amendment. A confirming bank may, however, choose to advise an amendment without extending its confirmation and, if so, it must inform the issuing bank without delay and inform the beneficiary in its advice. c. The terms and conditions of the original credit (or a credit incorporating previously accepted amendments) will remain in force for the beneficiary until the beneficiary communicates its acceptance of the amendment to the bank that advised such amendment. The beneficiary should give notification of acceptance or rejection of an amendment. If the beneficiary fails to give such notification, a presentation that complies with the credit and to any not-yet-accepted amendment will be deemed to be notification of acceptance by the beneficiary of such amendment. As of that moment, the credit will be amended. d. A bank that advises an amendment should inform the bank from which it received the amendment of any notification of acceptance or rejection. e. Partial acceptance of an amendment is not allowed and will be deemed to be notification of rejection of the amendment.

f. A provision in an amendment to the effect that the amendment shall enter into force unless rejected by the beneficiary within a certain time shall be disregarded. Note that the present UCP500 Article 9, sub-article 9(d)iii reads almost the same as the revised 10(c) above: iii. The terms of the original Credit (or a Credit incorporating previously accepted amendment(s)) will remain in force for the Beneficiary until the Beneficiary communicates his acceptance of the amendment to the bank that advised such amendment. The Beneficiary should give notification of acceptance or rejection of amendment(s). If the Beneficiary fails to give such notification, the tender of documents, to the Nominated Bank or Issuing Bank, which conform to the Credit and not yet accepted amendment(s) will be deemed to be notification of acceptance by the Beneficiary of such amendment(s) and as of that moment, the Credit will be amended. Best Practices to Mitigate Risk Confused? Who wouldnt be? How can an amendment to an irrevocable instrument be forced upon an unsuspecting beneficiary who has not received it? Why would the International Chamber of Commerce (ICC) Banking Commission permit such language to continue? Some countries, including the United States, believed the language should reflect an official opinion of the ICC to the effect that a beneficiary presenting documents that complied with the amended terms of the credit should not automatically be subject to the terms of an amendment it may not have even received. For example, if a $100,000 credit permitted part shipments, the beneficiary shipped $25,000 as a first installment, and the credit had been amended to be reduced by $75,000 so only $25,000 could be shipped, a beneficiary that would not agree to such an amendment could be bound to it because it had shipped $25,000 and the credit had been reduced to that amountthus canceling the balance of the order. Clearly, this is not in the beneficiarys interests, and not the intention of the ICC. So, why was this not changed? Only two countries (the United States and United Kingdom) appeared to favor alternative language to the effect that the beneficiarys documents must also not have complied with the credit prior to the amendment. Unfortunately, some 19-plus countries disagreed. Fortunately, one must not forget the wording of UCP600 Article 10(a): Except as otherwise provided by article 38, a credit can neither be amended nor cancelled without the agreement of the issuing bank, the confirming bank, if any, and the beneficiary. The bottom line is that an unsuspecting beneficiary can feel trapped in a time warp of confusing language and practices. The best practice for a beneficiary, until the ICC Banking Commission further clarifies it, is to write into its underlying buy/sell agreement (pro forma invoice, contract) that the explicit consent of the beneficiary is required for an amendment to an LC to become effective against it.
Where to Learn More About UCP 600
If you are using letters of credit, either commercial or standby in your import-export operations, you need to know about the new rules, the changes, and how they are going to impact you. One reliable source is the United States Council for International Business (USCIB), U.S. affiliate of the ICC, which is offering training seminars in major cities nationwide (see list below). These will be presented by Frank Reynolds, member of the USCIB Banking Committee and U.S. Representative to the Incoterms 2000 Revision and myself.

UCP 600 Seminars From USCIB

Atlanta, GA Baltimore, MD Boston, MA Buffalo, NY Charlotte, NC Chicago, IL Cincinnati, OH Cleveland, OH Columbus, OH Dallas, TX Denver, CO Detroit, MI Grand Rapids, MI Hartford, CT Houston, TX Indianapolis , IN January 31 March 1 January 15 March 12 Februar y2 January 10 Februar y8 January 24 March 21 Februar y6 March 6 January 23 January 22 March 13 Februar y7 Miami, FL Milwaukee, WI Minneapolis, MN New York, NY Oakland, CA Philadelphia, PA Phoenix, AZ Pittsburgh, PA Portland, OR Saddlebrook, NJ St. Louis, MO San Diego, CA Seattle, WA Tampa, FL February 21 January 9 April 10 January 16 February 21 January 17 February 7 March 15 February 20 February 28 January 29 February 16 February 19 February 20

February 5 Details available at www.ucp600seminar.org or contact Davis Hodge, USCIB manager, e-commerce, marketing, and banking, 212-703-5061; edhodege@uscib.org. March 5 March 20 February 12 March 19 January 30

Kansas City, MO Knoxville, TN Los Angeles, CA Nashville, TN Memphis, TN