On July 1, 2007, UCP 600, the new rules governing letters of credit (LCs), will go into effect. This is the first revision of the UCP (Uniform Customs and Practices for Documentary Credits) since 1993 when UCP 500 was approved. UCP 600 seeks to clarify and simplify the rules in order to reduce the possibility of misinterpretation or misapplication.

The use of letters of credit has been decreasing worldwide for the last several years, in spite of an upsurge in 1997 due to the economic crises in Southeast Asia. Many reasons for this decline have been suggested, including increasingly costly bank charges, divergent interpretations by banks in different countries, and high incidences of documentary rejections. Some surveys have indicated up to 70% of LCs are rejected by banks on their first presentation.

In spite of decreased utilization, however, global commerce remains dependent upon this trade tool. In fact, close to 15% of annual world trade is done by LC – that equals $1 trilling dollars in business!

What is UCP?

The Uniform Customs and Practices (UCP) for Documentary Credits were first issued in 1933 by the International Chamber of Commerce. The purpose was to overcome conflicting national laws on letters of credit as well as to bring about uniformity in banking practices. The rules have been revised a number of times. The last revision (UCP 500) is used by banks and commercial enterprises in more than 175 countries.

The most recent revision, UCP 600, was more than three years in the making. The Banking Commission of the International Chamber of Commerce (ICC) was tasked with the revision and established two working groups for the purpose: a Drafting Group and a Consulting Group.

The Drafting Group considered more than 5,000 comments on the rules before agreeing to the new text.
The Consulting Group, which comprised more than 40 representatives from 26 countries, advised on, and proposed changes to the various drafts.

The final text, which has 10 fewer amendments than its predecessor, was adopted by unanimous vote of the Banking Commission on October 25, 2006. The new rules become available for incorporation into LCs beginning July 1, 2007.

UCP 600 has a number of substantial changes that affect not only how banks will determine compliance, but also how contracts for sales utilizing LCs should be written. Therefore, if your company utilizes letters of credit at all, you should seek some expert advice and/or training before making a sale that will be subject to the new rules. See the “Resources” section of this article for sources of information and training on UCP 600.

Some Highlights of UCP 600

These are just a few of the changes to UCP rules occurring in UCP 600.

UCP 600 Application (Article 1)

UCP 600 does not apply by default to letters of credit produced after July 1st. A statement needs to be incorporated into the credit (LC), and preferably also into the sales contract (if utilized), that expressly states it is subject to these rules. Article 1 also leaves open the possibility for either party to exclude the application of any part of UCP 600 as long as the exclusion is stipulated in the credit.

Irrevocable and Revocable Credits (Article 2)

One of the most important changes in UCP 600 is the exclusion of any verbiage regarding revocable letters of credit, which can be amended or canceled at any time without notice to the seller.

Actually, Article 2 explicitly defines a credit as “any arrangement, however named or described, that is irrevocable and thereby constitutes a definite undertaking of the issuing bank to honour a complying presentation.” Article 3 states that “A credit is irrevocable even if there is no indication to that effect.” And Article 10 makes it clear that “a credit can neither be amended nor cancelled without the agreement of the issuing bank, the confirming bank, if any, and the beneficiary” (seller).

This is good news for sellers. However, it is still possible for revocable letters of credit to be utilized based on the ability to exclude application of any part of UCP 600. Therefore, it is prudent for the seller to stipulate in the sales contract that the “buyer will open an irrevocable letter of credit”, and to check that the buyer’s credit does, in fact, either describe itself as “irrevocable” or state that it incorporates UCP 600 (without exclusion).

Definitions and Interpretations (Articles 2 and 3)

UCP 500 did not include a section defining the various terms used in the rules. UCP 600 has rectified this in order to enable more consistent interpretation. It also has included an article that clarifies types of signatures that are acceptable, as well as terms used to describe LC issuers, and other terms, like “prompt”, “immediately”, “as soon as possible”, which will be disregarded under the new rules.

Expiry Date (Article 6)

Rules now require that the credit must state an expiry date for presentation and that any dates that are stated for honoring or negotiation will be deemed to be the expiry date for presentation.

Time Allowed Banks for Document Review (Article 14)

Under UCP 500, banks have a “reasonable time … not to exceed seven banking days” in which to honor or dishonor documents. UCP 600 shortens the period to a maximum of five “banking days”.

However, Article 2 defines a banking day as “a day on which a bank is regularly open at the place at which an act subject to these rules is to be performed.” “Regularly open” and the rest of this definition is obviously open to interpretation and may, therefore, cause some confusion as UCP 600 becomes the standard for LCs.

Non-Matching Documents (Article 14)

The previous LC rules required documents that were “on their face” inconsistent with one another to be rejected as discrepant. UCP 600 provides 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 credit.”

Regarding addresses on the various documents, Article 14 indicates that they do not have to exactly match as long as the country is the same. The only exception is when addresses appear as part of the consignee or notify party details on a transport document, in which case they must be the same as stated in the credit.

Non-Documentary Requirements (Introduction)

Banks, under the new rules, should disregard all non-documentary requirements. This means that any requirement in the credit that is not specifically part of a required document will be ignored by the bank in determining conformity.

An example:

The buyer wants the product delivered and the LC paid only if the product is shipped on a vessel carrying a specific classification.

It is not enough, under UCP 600, for the buyer to state the requirement in the LC. He must actually require that the bank receive a copy of the vessel’s certification certificate.

Original Documents (Article 17)

There was considerable confusion under UCP 500 regarding the definition of “original documents”. Article 17 of the new rules attempts to define original documents with more precision. An original document will be any of the following:

any document bearing an apparently original signature, mark, stamp, or label of the issuer of the document, unless the document itself indicates that it is not an original.
any document that appears to be written, typed, perforated or stamped by the document issuer's.
any document that appears to be on the document issuer's original stationery.
any document that states it is original, unless the statement appears not to apply to the document presented.

Conclusion

UCP 600 is not a perfect document. Although it goes a long way toward simplifying and clarifying requirements for LC conformity, there is still scope for differing interpretation and application. This, along with the ability to opt out of any article, makes it imperative that sellers understand its requirements, carefully construct their sales contracts, and thoroughly review the requirements of credits presented by their buyers.

Resources on UCP 600

Letter of Credit Forum: An excellent website on letters of credit that includes the complete text of UCP 600, UCP 500 and related documents.

“Documentary Credits: 2007 Revisions”, ICC Publication 600: Publication can be purchased at the ICC Business Bookstore.

United States Council for International Business: Held nationwide seminars on UCP 600 through May 2007 and will add other seminars “as needed”. Or, to find a list of private firms that are providing seminars, Google: training and “UCP 600”.