OPINION UCP 600: Was it Really a Step Forward?

1 OPINION : [2009] Introduction of Article 12(b) in theUCP 600: Was it Really a StepForward?Koji Takahashi Bankers duties; Codes of practice; Documentary credits; Fraud;Issuing banks; Letters of credit; Risk managementThe 2007 revision of the Uniform Customs and Practice for DocumentaryCredits (the ucp 600 ) introduced a new provision in (b), whichprovides: By nominating a bank to accept a draft or incur a deferred paymentundertaking, an issuing bank authorizes that nominated bank to prepay orpurchase a draft accepted or a deferred payment undertaking incurred by thatnominated bank. This provision is designed to apply in the situation where the nominatedbank which has incurred a deferred payment undertaking discounts itsobligation before maturity and subsequently a fraud by the beneficiary isuncovered.

2 As it explicitly authorises the nominated bank to prepay adeferred payment undertaking, the effect is that the issuing bank is notrelieved of its obligation to reimburse the nominated bank even if the fraudcomes to light before provision has been widely welcomed as facilitating trade financefor the beneficiary who wishes to shore up its cash by obtaining adiscounted payment of article, however, casts doubt whetherthe introduction of (b) should be seen as a step in the right reason is that, as detailed below, it has effectively eliminated a usefuloption of risk allocation. Professor of Law at the DoshishaUniversity Law School, Japan.

3 I had thebenefit of presenting my thoughts at theannual conference of the JapaneseAcademy for International BusinessTransactions (November 2, 2008 at theDoshisha University). I would like torecord my gratitude to the audiencemembers and especially Mr HidenoriHirano for their helpful errors are solely Michael Isaacs & Michael Barnett, International Trade Finance Lettersof Credit, ucp 600 and Examination ofDocuments 22 (12) (2007) , 661; Robert Parson, ucp 600 ANew Lease of Life for DocumentaryCredits? Part 2 9 2 (2007) Financeand Credit Law 1; Ebenezer Adodo, The Legal Effect of Nomination underthe New ucp 600 23 (4) (2008) 231; Deborah Horowitz, Banco Santander and the ucp 600 [2008] Journal of Business Law 508;Hidenori Hirano, The risk allocationof fraud in deferred payment credittransactions [2005] Annual of theAcademy for International BusinessTransactions (forthcoming) (inJapanese).

4 Cf. For critical views, see, Janet Ulph, The ucp 600 :Documentary Credits in the 21stCentury [2007] Journal of BusinessLaw 355, 374; Kazutaka Fujita, Thelegal status of a prepaying bank underthe deferred payment credit 31 (2007)Journal of Osaka University of ArtsJunior College 129 (in Japanese).2 Banco Santander SA v Bayfern Ltd[2000] 1 All (Comm) 776 CA. For asummary of the facts and decision, seeEbenezer Adodo, The Legal Effect ofNomination under the New ucp 600 23 (4) (2008) 231 at [234].Prior to the introduction of (b) by the ucp 600 , the issuingbank could assert a fraud by the beneficiary as a defence to a claim forreimbursement by the nominated bank where the latter has discounted itsobligation under a deferred payment undertaking without the knowledgeof the fraud.

5 This is because the nominated bank under a deferred paymentcredit, by definition, has the issuing bank s authority to incur a deferredpayment undertaking and to pay at maturity but, without a further explicitauthorisation as conferred under (b) of the ucp 600 , it does nothave a requisite mandate to pay before maturity. The well-known decisionof the English Court of Appeal inBanco Santander SA v Bayfern Ltd2confirmed this point under the ucp 600 and it is submitted that thedecision accords with legal soundness of its reasoning is attestedby the fact that in other countries, too, judgments had been renderedon the same basis.

6 Such as the Singaporean decision ofCredit AgricoleIndosuez v Banque Nationale de Paris4and the South African decision ofVereins-und Westbank AG v Veren legal position is notharsh on the nominated bank because it is under no obligation to makeprepayment even if it has added confirmation to the credit and because itcan determine the rate of discount commensurate with the risk of , a deferred payment credit allows the issuing bank time toinvestigate any possibility of fraud on the part of the beneficiary sincethere is often a substantial interval between the time for the presentation ofdocuments and the other hand, in the case of a negotiationcredit, since the nominated bank is authorised to negotiate, purchase[2009] , ISSUE 6 2009 THOMSON REUTERS (LEGAL) LIMITED AND CONTRIBUTORS286 OPINION .

7 [2009] and/or documents on or before reimbursement from the issuingbank is due, the issuing bank cannot assert a fraud by the beneficiarywhich has been revealed after the nominated bank purchased a follows that prior to the introduction of (b), the risk of fraud couldbe allocated between, on the one hand, the issuing bank or ultimately theapplicant and, on the other, the nominated bank by choosing between thenegotiation credit and the deferred payment , if an applicanthas a good knowledge of its customer qua the beneficiary, it may not bereluctant to embrace the risk of fraud on the part of the latter.

8 In such cases,a negotiation credit could be chosen. In other cases, the beneficiary whichhas a proven record of integrity with its banks may be confident that itcould arrange for a discount of credit. In such cases, a deferred paymentcredit could be distinction between the two types of credit has been removed bythe introduction of (b) by the ucp 600 ,9with the result that therisk of fraud now lies with the issuing bank or ultimately the applicant,regardless of which basic type of credit is used, be it the sight paymentcredit, acceptance credit, negotiation credit or deferred payment , if the issuing bank or the applicant is to avoid the risk offraud, it would be necessary11to insert in their letter of credit a clauseexcluding the application of (b).

9 12It would be safe to say generallythat as between a rule which makes a useful option readily available anda rule which has to be excluded in order to make room for a useful option,the former is superior for its better usability. In the present context, theexclusion of (b) would not only be cumbersome but also difficultin practice. The reason is that under the underlying contract with theapplicant, unless there is any special agreement, the applicant would beobliged to procure a letter of credit on usual terms. A credit excludingprovisions of the UCP may not be regarded as such. Nor would it beeasy to obtain the beneficiary s agreement to exclude (b) since thepurpose of such exclusion is none other than the avoidance of the riskof fraud by the beneficiary, a point the applicant would not wish toraise to the beneficiary when it is negotiating to conclude an making similarlypositive appraisals include, DanielAharoni & Adam Johnson Fraud andDiscounted Deferred PaymentDocumentary Credits: The BancoSantander 15 (2000) 22, 25; Presenters Immune from the FraudRule in the Law of Letters ofCredit [2002] Lloyd s Maritime &Commercial Law Quarterly 10, 20.

10 EyalBerger, Putting Florida Buyers on parwith International Buyers: ACost-Benefit Analysis of RevisingFlorida Statute (1)(A)(4) 16(2004) Fla. J. Int l L. Agricole Indosuez v BanqueNationale de Paris[2001] 2 Westbank AG v VerenInvestments2000 (4) 238. EyalBerger, Putting Florida Buyers on parwith International Buyers: ACost-Benefit Analysis of RevisingFlorida Statute (1)(A)(4) 16(2004) Fla. J. Int l L. 529 at [535], saysthat the judgment to the same effectwere rendered in France, Germany,Switzerland and Israel, though it relieson a somewhat dated material, , Discounting of DeferredPayment Credits ComparativeAspects 10 (1983) Banking & Fin.