New UCP 600 entered into force
on the first of July 2007
On the first of July 2007 the UCP 600 (Uniform Customs and Practice for
Documentary Credits) came into force. This document is the newest version of the
UCP, a set of rules first drafted in 1933 by the ICC in Paris as the applicable legal
framework under which Letter of Credit (L/C) operate internationally. UCP 600
replaces the former UCP 500 version.
The purpose of the present memorandum is not to make a comprehensive review
of the UCP 600 but merely to highlight the changes of relevance to traders.
What has really changed?
* The UCP 600 have been drafted with a view to clarifying the most
important issues that were left unclear by the UCP 500. It follows from this
that most differences between UCP 500 and UCP 600 are clarifications
rather than actual changes.
* Many of the provisions of the UCP deal with the relationship between
banks engaged in a particular Letter of Credit transaction. As a result, a
majority of changes affect the banks' "internal" relationship and have only
an indirect effect on the traders on whose behalf the L/C is operating.
* The major changes introduced by the new UCP 600 which might be of
interest to traders, are the following:
1. Article 1 UCP 600: Unlike UCP 500, UCP 600 does not apply
unless it is expressly mentioned in the text of the L/C.
2. Article 2 UCP 600: A list of definitions includes some substantive
elements. One definition changes the choice of UCP to the default
type of L/C: The default type of L/C is now the irrevocable L/C.
Parties wishing another type of L/C need to expressly clarify this
(see also Articles 1 and 3 UCP 600)! Not covered by this
presumption is the differentiation between a confirmed an
unconfirmed L/C. As no presumption relating to the status of
confirmation exists this important choice needs to be expressly
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made in the payment clause of the sale and purchase agreement
and the L/C.
3. Article 14 UCP 600: This Article describes the standard for
examination of documents by the banks. It is made clear that the
banks will disregard all non-documentary requirements. If such a
requirement reflects a fact of crucial importance to the buyer, he will
have to think of a form of documentation which can certify the
compliance with that fact (e.g. the classification of a vessel by
production of a classification certificate). The seller in turn will have
to be convinced that he is in a position to meet such additional
requirement.
For the examination of documents the banks now have a
maximum of five banking days following the day of presentation,
and no longer the "reasonable time not exceeding 7 banking days"
(see also Article 16 (d) UCP 600). The deletion of the criterion of
"reasonable time ..." might mean that traders have to accept that
banks, despite an earlier decision on conformity, could now wait for
the fifths day to pay the L/C amount to the seller. Again, this could
possibly be an area where the sale and purchase agreement (and
the subsequent negotiation with the banks) might provide for
another solution, possibly a shorter time for the examination by the
banks.
Furthermore, and in order to reduce instances of discrepancies,
Article 14 (d) UCP relating to the issue of standard of examination
now clarifies that data in a document, when read in context with the
credit, the document itself and international standard banking
practice, need not be identical to, but must not conflict with data
in that document, any other stipulated document or the L/C. This
replaces the old test of "inconsistencies on the face of the
documents" applied by UCP 500. Whether this is a mere
clarification or a change of substance will have to be determined by
the new practice under UCP 600.
4. Article 18 (a) (iii) UCP 600: Under the new UCP the commercial
invoice must be made out in the same currency as the L/C.
5. Article 20 UCP 600: Bills of lading may now allow trans-shipment
(e.g. by the use of liberty clauses or even by an express statement
that the goods will in fact be trans-shipped), provided that the entire
carriage is covered by one and the same bill of lading. Therefore,
where trans-shipment is intended to be excluded, a change to this
provision must be agreed on in the sale and purchase agreement
and the L/C.
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6. Article 22 UCP 600: The particular form of a charter party bill of
lading has now been defined, but at the same time unlike the UCP
500, the new UCP no longer mentions that a charter party bill of
lading must be explicitly allowed.
It is not clear whether the payment clause in a sale and purchase
agreement (and subsequently the L/C) must still allow such
documents expressly or whether now the charter party bill of lading
is an acceptable document besides the general bill of lading.
Therefore, any parties intending to use or allow such charter party
bills of lading in their trade should expressly note this in the L/C.
Need for action?
* Any change of an important parameter in a trade transaction (such as the
change from UCP 500 to UCP 600) requires adaptation. As the major
changes do not, however, directly affect the trader submitting his trade to
the UCP Rules, the need for adaptation is minor.
* Changes are also opportunities: As the UCP 600 clarifies and eases for
some principles relating to documentation and their presentation, the
traders have gained more flexibility in which they can work under a given
L/C.
* As every trade and indeed every trader is unique, the need for adaptation
and the values of the new opportunities will be different for each of the
participants in international trade.
* This requires a careful reading of UCP 600 in the actual context of the
businesses the traders are involved in.
* The existing trade contracts which cover an opening of an L/C under UCP
500 must be checked to safeguard that the actual L/C is opened in
conformity with the sale and purchase agreement. It is advisable for
traders to confirm the situation with their bank and, if applicable, to apply
for a change of wording in the payment clause to allow the L/C to be
opened under UCP 600.
* To avoid mistaken references to UCP 500 or to facilitate a smoth transition
to yet another version of UCP 600 in the future, sales and purchase
agreements might in their L/C ­ or payment ­ clause refer to "L/C subject
to UCP in its latest version".
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* The issues raised above and the possible steps suggested here are
obviously very general and should not be relied upon to make a decision in
a specific case. They need to be revisited by each trader, preferably in
consultation with its bankers and lawyers.
Prof. Dr. Alexander von Ziegler
alexander.vonziegler@swlegal.ch
Dr. Giovanna Montanaro
giovanna.montanaro@swlegal.ch
Schellenberg Wittmer
Rechtsanwälte
Löwenstrasse 19
Postfach 1876
8021 Zürich
Tel. +41 (0) 44 215 52 52
Fax +41 (0) 44 215 52 00
Mr. Bernard Vischer
bernard.vischer@swlegal.ch
Schellenberg Wittmer
Avocats
15bis, rue des Alpes
Case postale 2088
1211 Geneva 1