We examine former Guidance Papers in this blog, and will take a look at current papers in future blogs.
Position Papers 1, 2, 3, 4 (UCP 500)
Back in September 1994, the ICC Banking Commission noted, pursuant to the release of UCP 500, that various banks had been applying unilateral and incorrect interpretations to certain of its articles. It was stated that by prejudicing the proper and correct application of the UCP 500, the effect had been to seriously interfere with the use of documentary credits issued in accordance with the UCP, as the means for effective and secure settlement of trade transactions on a worldwide basis.
As a result, the Banking Commission authorised the issuance of four 'Position Papers' to emphasise the need to correctly interpret and apply:
At the time, the Banking Commission strongly urged ICC National Committees, and associated organisations, to distribute the Position Papers as widely as possible to help in ensuring the future smooth running of credits issued under the protection of UCP 500. However, it became clear that not all practitioners were aware of the content of the Position Papers and that the hoped-for results were not fully realised.
In due course, the content of the Position Papers was adapted and included within UCP 600.
Original Documents (UCP 500)
On 12 July 1999, the ICC Banking Commission issued a guidance paper, which noted that over a period of several years there had been a number of queries raised with the ICC Banking Commission as to the determination, by banks, of what is an "original" document under a letter of credit and the necessity, if any, for such a document to be so marked.
At the time, UCP 500 sub-Article 20(b) read:
provided that it is marked as original and, where necessary, appears to be signed.
A document may be signed by handwriting, by facsimile signature, by perforated signature, by stamp, by symbol, or by any other mechanical or electronic method of authentication."
A number of statements were included in the paper which were intended to reflect international standard banking practice in the correct interpretation of UCP 500 sub-Article 20(b).
During the revision of UCP 500 to UCP 600, the necessary wording was updated, thereby negating the need for continual referral to this guidance paper.
Examination of Documents, Waiver of Discrepancies & Notice (UCP 500)
On 9 April 2002, the ICC Banking Commission released a paper that was intended to be an educational document meant to help users and document checkers deal with problems that arose under Articles 13 and 14 of UCP 500, which had generated a number of queries to the Commission.
Articles 13 and 14 of UCP 500 specifically prescribed the actions of an issuing or confirming bank in the examination of documents presented under a letter of credit. The process outlined in the UCP specifically dictated the process of examination of documents, the decision as to whether to take up or refuse the documents, the process of seeking waiver of discrepancies by the issuing bank, providing notice of discrepancies and the reasonable time for the performance of the steps prescribed by the UCP.
It was noted that since the implementation of the revision of the UCP in 1993, several variations on the performance of the prescribed procedures in the UCP had evolved, many of which were not in accordance with the UCP. The development of these practices outside the scope of the UCP had potentially placed the issuing bank at risk for not complying with the terms of the UCP.
It was highlighted that this document only addressed the obligations of the issuing bank because they are the only bank authorised to seek waiver from the applicant. Similar obligations could apply to the confirming bank with the exception of the seeking of waiver from the applicant.
The conclusion of the paper emphasised that issuing banks should follow these rules or understand the risks they may be taking when they deviate from the rules.
The key aspects of this paper were adapted for UCP 600.
Transferable Credits (UCP 500)
At the April 2002 Banking Commission meeting, a first draft of a paper on Transferable Credits was presented and discussed.
This paper brought together and represented a summary of the main Banking Commission Opinions on the subject of application of UCP 500 article 48 and Transferable Credits in general. Article 48 being one of the articles that had received the most queries in the few years prior to 2002. The paper did not seek to provide answers as to specific transferable letter of credit practice nor to issues that had not been previously agreed by the Commission.
During the discussion at the meeting, a number of the comments sought to change the viewpoint that had been expressed in past (agreed) opinions. In addition, there was a feeling that the document should in some way look at issues of practice. It was outlined, that the intention of the paper is to create a document that brings together a selection of the opinions that have a direct bearing on day to day issues relating to transferable credits. A number of the opinions that had been given were specific to certain circumstances or of an obscure nature and had not been included. It was decided that this did not undermine the status of opinions not included, details of which can be found in ICC Publication No. 632, which is a compilation of opinions given since the introduction of UCP 500.
The key aspects of this paper were considered and adapted for UCP 600.
Non-bank issuance of documentary credits (UCP 500)
On 30 October 2002, because of widespread interest in this subject, the ICC Banking Commission decided to issue an official Opinion on non-banks and letters of credit.
It was mentioned that although there was no affirmative rule in the UCP prohibiting entities that were not banks from issuing, confirming, paying, negotiating, or advising letters of credit, its vocabulary ("issuing bank", "confirming bank", etc.) assumed that these entities are banks.
This assumption was based on the recognition that there are three principal advantages to bank issuance and handling of letters: namely that banks have the operational expertise to handle issuance and presentation under letters of credit in a professional manner, that they have the tradition of independence from the underlying transaction which is the basis of the commercial reputation of the letter of credit, and that in virtually all countries banks are specially regulated with a view toward protecting those who rely on their undertakings.
The paper concluded that it does not "violate" the UCP for a non-bank to issue a credit subject to the UCP even though such issuance is not contemplated in the rules. The UCP did not specifically provide for bank advice of non-bank issued letters of credit. Such an advice should accurately identify the issuer and indicate the advising bank's limited role. If the form of advice referred to the "issuer" as "issuing bank" or otherwise gave the impression that it was a bank, it was recommended that the advice affirmatively disclosed the non-bank status of the issuer in order to correct any mistaken impression caused by such reference.
The paper stated that the consequences of insolvency were a matter for local law, whether the insolvency was that of a bank or non-bank issuer. In either case, however, the beneficiary assumed the risk of the creditworthiness of the issuer unless it was offset by obtaining confirmation or credit insurance. These conclusions are reflected in ICC Official Opinion R505 / TA537.
As you may be aware, consideration was given again to this subject when drafting UCP 600. Whilst some practitioners, including the authors of this article, recommended that the UCP specifically address this issue, support was not forthcoming from ICC National Committees.
In our view, this was a short-sighted approach which was primarily based on a protectionist viewpoint. The fact is that non-banks do issue documentary credits.
The point to be borne in mind, as highlighted in ICC Official Opinion TA855rev, is that a non-bank issuer is held to the same obligation and standard of care as would be the case for an issuing bank. Non-banks are not, and should not be, prohibited from issuing documentary credits.
Although this paper is applicable to UCP 500, Opinion TA855rev continues the applicability with UCP 600.
Given the importance of the issue, to this day, R505 is the only ICC Opinion that has been posted on the ICC's website.