Revision of UCP500 gathers pace

Gary Collyer, director and global product manager, traditional trade services and trade finance at ABN Amro, reviews the latest developments in the UCP revision. As technical adviser to the ICC Banking Commission and chair of the UCP revision group, he explains why the revision is taking so long, what changes are being contemplated and estimates when the trade community can expect implementation of the new rules.

During 2002, the banking commission of the International Chamber of Commerce (ICC) agreed to commence the process for a revision of the UCP500, the most widely used set of rules in international trade today. Now, as we approach mid-2005, a few individual articles are still to be drafted by the drafting group; or, in the case of the bulk of the articles, are subject to review and comment by the ICC’s national committees and groups that are based in some 90 countries.

Historically speaking

The ICC’s UCP publication was first issued in 1933 and has, on average, been subject to a revision every ten years or so. Despite more than 70 years of usage, it is probably fair to say that a lot of the problems inherent in handling letters of credit (LC) have not been eradicated or eased by the different revisions. This is not a reflection on the working groups that were established to complete those revisions but in some respects the users themselves – ie, banks, corporations, shipping, insurance and other entities involved in the transaction – with regard to how they have interpreted and applied those rules in respect of each LC.

As an example, depending on the publication you read, rates of discrepancies in documents on first presentation are estimated as anything between 60% and 80%. One bank admitted to a rate of over 95%. The fundamental issue is that this rate has not materially changed over the years. Indeed, some 15-20 years ago, the rate was in a similar band. However, the basic question still remains: “How many presentations of documents that make up that 60%-80% are actually discrepant as opposed to a failure of a bank to correctly interpret and apply the principles of the UCP?”

No set of rules will, by itself, reduce the level of discrepancies, but what it can achieve is a better form of understanding as to the correct interpretation and application of the rules. For example, a set of rules will not overcome issues where the beneficiary of a LC presents its documents after the expiry date, where they ship after the latest shipment date or the documents themselves contain information that conflicts with the terms of the LC. The drafting group for this revision, of which I am the chair, has deliberately set out with the aim and purpose of producing a set of rules that will leave little scope in terms of interpretation and to provide increased clarity in areas where the UCP has seen consistent issues raised in the past.

To put some of these issues into context, since the implementation of UCP500, the ICC has been required to issue four position papers, two decision documents and then, in 2003, to publish ‘International Standard Banking Practice (ISBP) for the Examination of Documents under Documentary Credits’. In between there have also been a number of educational papers including those covering the handling of transferable credits and the examination, waiver and notice requirements when a bank refuses documents. On top of this, responses have been made to over 450 requests for ‘official’ ICC opinions on specific disputes, issues of clarification, interpretation and application of the rules.

Revision process to date

The latter part of 2002 through 2003 saw a review of all the ICC opinions that had been issued under UCP500. The purpose of this extensive exercise was to identify how many of 450-plus requests for opinions could be attributed directly to a problem with the wording in the UCP:

• due to there being more than one possible interpretation;
• due to it not going far enough to answer the initiator’s problem and with some expansion of the text or a revised wording this would have resolved the issue(s); or
• due to a lack of coverage of the particular issue(s).

This exercise threw up some interesting data in that it was found that seven articles of the UCP accounted for over 58% of all the opinions issued. While at the other end of the spectrum, 17 articles had given rise to nil, one or two opinions. Clearly, a major focus of attention for the revision would immediately centre on these seven articles which, in numerical order, were nine, 13, 14, 21, 23, 37 and 48. Conversely, the fact that 17 articles had given rise to a maximum of three opinions would not necessarily mean these articles would remain unaltered.

This revision process has seen the creation of a new concept. In addition to a drafting group, which consists of nine members, what has become known as a consulting group has been created, consisting of 41 members based in 26 countries. The creation of this group allows for draft texts to be distributed among those members for a preliminary review before the general distribution takes place. In this way, the drafting group can gauge whether new concepts, ideas or text will work or where additional ‘tweaking’ may be required. One of the major aspects of this intermediary step is the ability to understand whether the wording that is being proposed translates well into local language (given that the UCP is translated into a number of languages) and leaves little or no room for interpretation. Following feedback from the consulting group, the drafting group will re-draft as appropriate and arrange for distribution to the ICC’s national committees and groups.

The process of revising the UCP is not limited to one specific industry or group. To this end, the ICC’s commissions on transport, insurance and commercial law and practice have, and will continue to be, canvassed for their views on the various draft texts to ensure that the positions taken in the new UCP are reflective of industry practices.

The drafting group has approached the revision with a number of ‘principles’ in mind:

• that the revision be a ‘technical’ one reflecting changes in practice;
• use ‘plain and simple’ english;
• keep what works well and modify if necessary;
• delete redundant or outdated articles;
• consider the inclusion of new concepts/rules and align, where applicable, to other ICC rules; and
• provide a commentary to supplement the implementation of the rules. This is considered as a must by the drafting group on the basis that it is available at the same time as the rules are published. The availability of a commentary further reduces any risk of a different interpretation being taken by a specific bank or group of banks in a country.

New ideas, concepts and what is being considered for inclusion, deletion or modification

Since UCP500 came into force, the ICC has issued three sets of rules that have had an impact on LC operations, namely ISP98 (international standby practices), URR525 (bank-to-bank reimbursement rules) and eUCP (the electronic supplement to UCP). As part of the revision, decisions have had to be taken as to whether these rules remain separate or can, in some way, form part of the new UCP.

In relation to ISP98, which is specifically designed for standby letters of credit (SBLC), the question is whether we rely on those rules for SBLC’s in the future and delete reference in the UCP or whether the option remains in UCP for SBLC’s to be issued subject to those rules. The current view is that there has not been a sufficient shift of issuances from UCP to ISP to warrant removal of a reference to SBLCs in the UCP.

The logical step with respect to URR525 would be to insert these rules in place of the current Article 19. While the drafting group would support such a move, it is not feasible due to the ISP98 specifically making reference to the ICC rules on bank-to-bank reimbursements. The compromise has been a revised wording for Article 19 that stipulates that URR525 will apply unless the LC states otherwise.

eUCP is still to be tested and the reason for its issuance as a supplement was to aid any ‘quick’ revision that may need to be made in light of electronic initiatives or developments. For these reasons, the current thinking is that eUCP will remain as a supplement.

Other considerations that have been actioned or are under discussion:

• revocable letters of credit are seen as a dying breed and the drafting has been completed without any reference to this type of issuance. If a bank wishes to issue such an instrument they would need to incorporate the full terms of the revocability within the text of their credit;
• UCP500 Article 38 titled ‘other documents’ does not feature in the new draft due to its limited application;
• reasonable time for a bank to examine documents as defined in the UCP today is “a reasonable time, not to exceed seven banking days following the day of receipt of the documents, to examine the documents and determine whether to take up or refuse the documents and to inform the party from which it received the documents accordingly”. However, this wording has given rise to various interpretations including “reasonable time equals seven banking days”, which clearly is not what is being stated. The drafting group has sought to tackle this issue through two draft texts. The first was to reduce the number of days to six while using wording that demonstrated that ‘reasonable time was a reasonable time’ and that the six (or seven) days was the outer limit to that concept. Following comments received, this has now been re-drafted and is before the ICC’s national committees and groups with a structure similar to that which appears in ISP98, ie, a reasonable time is three banking days following the day of receipt of the documents; more than seven banking days following the day of receipt of documents would be unreasonable and days four to seven may or may not be reasonable, such determination being subject to circumstances. At the time of writing this article, the views of the respective countries are still awaited on this important aspect of the rules;
• what will happen to the ISBP publication? At the moment, the drafting group has been fairly selective in taking some of the paragraphs of this publication and incorporating them into the new UCP draft text. As the transport documents develop, this may increase significantly and therefore decisions will need to be taken as to whether it remains as is, will be amended by a form of corrigenda (as has happened in the past), or whether a new publication will be warranted.

A number of other concepts are being introduced into the drafting of the articles but, as you will appreciate, are subject to the general agreement of the ICC national committees and groups, so until agreement has been obtained it may be confusing to list them here. If your organisation is a member of the ICC then someone will be receiving the draft texts for comment. If you are not that person, it may be of benefit to seek them out, see the drafts for yourself and maybe offer some comment that can be elevated up to the country input.

Possible implementation date for the new UCP

A number of people are suggesting possible dates in 2005, 2006 or 2007. The plain and simple response is that the rules will be available for implementation when the drafting group has finished drafting, the ICC national committees and groups have confirmed their agreement thereby signifying that everyone is happy with the final product and that we all believe that the final version reflects customs and practices. History will also tell us that between the date of agreement on the final text and the date of implementation, there is usually a gap of some six to nine months, during which banks and other organisations can train their staff and customers, amend their publications and application forms plus the systems that support the LC process.

While there is still some way to go to get the agreement on the drafts, the finish line is increasingly coming into sight.