TheUCP 600 rulesinLetterofCredit(LC): Selected Issues

1 Proceeding8'h UUMI nternationalLegalConference2015( )25-26 August2015,Bandung,IndonesiaTheUCP600 rulesin Letterof Credit(LC):SelectedIssuesRosmawaniChe ,MalaysiaAbstractTheUniformCustomsandPra ctice(UCP)is the primarysourcefor letterof credit(LC) the publicationof the UCP,the rulesin LC originatingfromtradecustomsandpracticesw erenot unanimouslyappliedby Commerce(ICC)whosefunctionis to harmonizethe varioustradecustomspracticedin LC,hadinitiatedto compilethoserulesandpublishedthemunderon especificreferenceandnamedit as the orderto servecurrentmarketneedsin regardsto LC , thereis no specificstatuteregulatedfor ,thoughcustomaryin natureandhasno legaleffect,hasbeenadoptedby ,it is unlikelyto findthe LC transactions,whichis not governedby the the previousversions,the latestversionof the UCP600is claimedto be comprehensiveandoffersmodificationto the thelatestUCP600focusingon the significantissuesin LC suchasbankers'autonomy,revocableandirrev ocableLC,strictcompliance,noticeof previousversionsof the UCPandreviewsare addition,referenceissoughtto case-lawto ,thispaperexaminesthe improvementscontributedby not least,it seeksto submitproposalsfor futureimprovementof the.

2 UCP600;Letterof Credit;autonomy;strictcompliance;noticeo f refusal,fraudI. IntroductionLetterof credit(LC)is claimedto be the mostfamousandcommonmethodof paymentin its characteristics,whichprovidessecurityand facilitatetradebetweenexporterandimporte r,LCis frequentlyusedandalwaysreferredto as a 'life-bloodof internationaltradeandcommerce.'(KerrJ, 1977;DonaldsonLJ,1981).LC servesas an importanttoolto overcomethe problemsof LC is to provideefficientpaymentby usingthe bankas areliablepaymasterto automaticallypaidoncehe has presentedto thebankdocumentswhichare strictlycomplyingthe LC requirements,whereasthe importerdoesnot haveto payshouldthe exporter'sdocumentscontaindiscrepanciesa ndnon-compliancewiththe descriptionof the goodsinthe transactionis governedby the UniformCustomsandPracticefor DocumentaryCredit(UCP).TheUCPcontainsa compilationof rules,whichare originatedfromancienttraders' ,theseruleswerenot orderto avoidambiguityanddivergentpractices,the InternationalChamberofCommerce(ICC)had takena reasonableeffortto gatherthosepracticesandcodifiedthemunder onereferenceandpublishedit in a formof rules,namedthe the UCPwaspublishedin UCP1933;andit has beenrevisedin 19S1( ),1962( ),1974( ),1983( )and1993( ).

3 Thelatestrevisionis implementedon 151 July,2007( ).2. Provisionsof UCP600 - A Principleof autonomy:Article5 Principleof autonomyindicatesLC is separatefromthe a banktomakepaymentis subjectedto complianceof exporter' pursuantto this,the bankshallnotinvolvewithanydisputerelatin gto the goodsunderthe ,anyconflictbetweenimporterandexporterar isingout of the salecontractwillnot be a conditionto the bankfor the Schoolof Law,Collegeof Law,Governmentand InternationalStudies, 'h UUMlnternationalLegalConference2015(ISBN :978-967-0910-03-1)25-26 August2015,Bandung,IndonesiaTheUCP600enh ancesthe roleof the banksin LC transaction,whichis restrictedto ,be it issuingbank,confirmingbankor negotiatingbankare dealingwithdocumentsonlyandnot withgoods,servicesor thisprovision,the previousUCPdid notspecifythispositionwhenit isgenerallystatedthat'people'in LCare 'bank'is not specificallymentioned;ratherit is impliedlycategorizeda bankunder'people'.

4 Theuse of the word'people'is criticizedasnot suitablesincein LC transaction,not all peopleare restrictedto dealwithdocumentssinceexporterandimporte rare the partieswhoare alsoconcernedwiththe goodstransacted.(ICCC ommentary,2007).Theonlypartywhois dealingwithdocumentis the ,article5 is moreidyllicin designatingthe bank'sautonomousobligationin regardsto LC obviouslyseparatesthe bankwiththe salescontractsenteredintoby the ,thisprovisiontotallyencapsulatesthe functionof the bankrelatingto the All creditsare irrevocable- Article3 Priorto the UCP600,LC is categorizedintotwotypes,revocableandirre vocable.(Article6, UCP500).Revocablecreditis a creditthatcan be cancelledor amendedby the applicantwithoutpriornoticegivento thebeneficiary.(Article8(a),UCP500).This characteristicreflectsthata revocablecreditis not absolutelysecureas the applicantimportermaycancelit at any timewithouthavinganyresponsibilityto notifythe exporter.

5 (PerBailhaceJ, CapeAsbestosCo Ltd v Lloyd'sBankLtd,[1921]WN274,at 275).It is notedthata revocablecreditmaygiveleewayfor an importerwhohasreceiveda betterofferfor saleof similargoodsto breakon hiscontractwiththeexporterandterminateth eLC.(Chuah,2005).Consequently,the exporter'spositionisvulnerablesincehe has no choicebut to seeklegalredress, LC isnot populardueto its lackof security,revocablecreditis stillrelevant,as its issuancecostis goodbusinessrelationshipsuchas a parentcompanyandits subsidiaryhavealwayspreferto usethistypeof usingrevocableLC is simplyto get paymentfor the goodsandthereis nonecessityto opt for virtueof Article3 of the UCP600,the abovecategoryof a revocablecredithas ,therevocableconceptis no longercoveredunderUCP600andit remainedwiththe ,it isinterestingto notethatdespiteArticle3 of the UCP600,revocableLC canstillbe issuedor allowedto becircularisedby virtueof ArticleI.

6 RevocableLC is embeddedunderthe meaningof ArticleI, whichstates:' .. theyare bindingon all partiestheretounlessexpresslymodifiedor excludedby the credit.'Thisarticleprovidessomeroomfor businesspeoplewhowishto opt for revocableLC by modifyingorexcludingpartsof the pricesin the openmarket,especiallyof commoditiesandotherlimitedsuppliedgoods, maytriggerthe use of a wouldbe usefulfor the importerto insiston the issuanceof revocableLC in orderto avoida suddenincreaseof pricein the countryof the exporterbeforeshipmenthas ,an irrevocablecreditgivesa bindingundertakingto the beneficiary,whichcannotbe revokedoncecommunicated.(King,2001).Impl icitly,it createsan irrevocableundertakingon the partof theissuingbankto paythe beneficiaryas longas the conditionsof the LC are compliedwith.(Article9(a),UCP500;Article s7, 8, UCP600).Thus,it providesmoresecurityto the beneficiaryas it cannotbe amendedorcancelledwithoutthe agreementof all the partiesto the credit.

7 (Article9(d),UCP500;Article10(a),UCP600) .In a localcaseof StandardCharteredBankMalaysiaBhdv DullYangMahaMuliaTuankuJa'afarIbniAlmarh umTuankuAbdulRahman,YangDi PertuanBesarNegeriSembilanDarulKhusus,[2 009]4 MLJI, itwasheldthat"an irrevocableStandbyLetterof Creditcannotbe revokedunilaterallyby customer."(PerAbdulHamidJ, 2009).Dueto the securityofferedby thistypeof LC,mostof the LCsissuedare becomesbindingonceit is communicatedto the beneficiary.(Jack,2001).Nevertheless,the UCP600doesnotprovidedetailedrulesrelatin gto the characterof ,dueto thisloopholein the UCP600the rulesrelatingto the irrevocablecreditprovidedby the UCP500stillcanbereferredto. For the sakeof convenience,it is suggestedthatthe characteristicof the irrevocablecreditshallbeexpresslyprovide din the nextfutureUCp,Peer-reviewunderresponsibi lityof the Schoolof Law,Governmentand lnternauonalStudies,UmversiuUtaraMalaysi aProceed109 8'" UUMlmemationalLegalConference2015(ISBN:9 78-967-0910-03-1) , StrictCompliance<ArticleJ4(d),(e), 0), ArticleJ8(c)In LC transaction,exportermustpresentthe documentsto the bankin orderto claimpaymentfor the in strictcompliancewithLC' 'spresentationcontaindiscrepancies,the bankwillnot is establishedthatthe percentageof documentaryrejectiondueto non-complianceon the firstpresentationby the exporteris amountto 75%.

8 Oneof the aimsof theWorkingGroupCommitteein draftingthe UCP600is to reducethe volumeof documentaryrej ection,whichisclaimedto be dueto the rigidityof the provisionsin the previousUCP,ie UCP500in regardsto ,the UCP600is draftedto simplifythe requirementof documentarycompliancein ordertoeradicatethe problemof ,the UCP500throughthe provisionof Article13(a),emphasizedthatthe documentsmustbeconsistentwithoneanother, otherwise,it willbe amountto ,by virtueof certainprovisionsin the UCP600,thisrequirementdeemsto be lessstrict(Christenfield& W. Melzer,2007;Younger,2010).Article14(d),U CP600expresslyprovides:Datain document,whenreadin contextwiththe credit,the documentitselfandinternationalstandardba nkingpractice,neednotbe identicalto, butmustnotconflictwith,datain thatdocument,any otherstipulateddocumentsor credit."It denotesthatthe requirementof complianceis fulfilledif the contentof documentsis not conflictwitheachotheras wellas withLC softenedthe requirementof complianceby usingthephrase'neednot be identicalto, but not conflict:whichimpliedlyrejectedthe mirrorimageor literalapproachof the datain documentswiththe LC ,thismodificationhas lessenedthe exporter'sburdenrelatingto documentarycomplianceas the requirementfor compliancebecomessimplerandeasierto addition,it is expectedto eliminateconflictsbetweendifferentdocume nts,whichis the mostfrequentgroundfor the dishonourof documentspresentedundercommercialLCs.

9 (Klein,2006).Furthermore,it givesthebankersa greaterdegreeofflexibilitythatshouldresu ltin fewerdiscrepanciesandrejections.(Bergama ,2007).But again,thisprovisiondoesnot objectivelystatethe criteriaof undoubtedlyimpliesa widercomplianceapproach,but it opensup roomfor potentialnewdisputesfor example,to whatextentthe datais notin reducethe volumeof discrepanciesin documentarypresentationis Article14(e)whichallowsthe goodsin all documents(otherthanthe commercialinvoice)to be describedin generalandnot be in conflictwithLC requirements.(Todd,2003).Moreover,Articl e14G)providesthataddressesofthe beneficiaryandapplicantneednot be the sameas thosein the credit,providedthattheyare in the consideredas helpfulreleaseto the exporteragainstthe problemsofinconsistencyof the spellingfor the ,in the newpositionunderthe UCP600,suchnon-complianceis no longerconsideredas ,despitethe toleranceofferedby the UCP600,it doesnot promiseonehundredper centleniencyfor the exporter.

10 (Bergami,2007).Therequirementof strictcompliancestillremainsin Article18(c)relatingtothe descriptionof the goodsin a states:Thedescriptionof the goods,servicesor performancein a commercialinvoicemustcorrespondwiththata ppearingin the credit."Theaboveprovisionexpresslymainta instherequirementof strictcompliancein ,the leniencyofferedby the UCP600to otherLC documents(Article14 (e), UCP600)and addresses(Article140),UCP600)are not extendedto commercialinvoicesincethe phrase"mustcorrespond"withtherequirement of LC in Article37(c)of the previousUCP500is ,by virtueof Article14(d)above,it couldbe suggestedthatthe phrase"mustcorrespond"shouldbe construedwithinthe meaningofthis provision,whichofferslessrigidityin Noticeof Refusal-ArticleJ 6If exporter'sdocumentscontaindiscrepancies, a bankneednot honourandmustsenda noticeof refusaltothe exporteror his the UCP500imposedon the IssuingBank,the ConfirmingBankor the negotiatingbank,to observea reasonabletime,not to exceedseven(7)