UCP 600 Document Examinations and 'Strict Compliance'
The International Chamber of Commerce Banking Commission released the document "Notes On the Principle of Strict Compliance" in May in an effort to analyze what is considered to be "strict compliance" in documentary credit issues. The document was drafted by David Meynell,the senior technical advisor to the ICC Banking Commission,and represents the position of the ICC Banking Commission Executive Committee.
This article aims to analyze and determine the "documentary examination standard according to UCP 600," (Uniform Customs and Practice for Documentary Credits),the latest international rules on the issuance and use of letters of credit. It was also to identify the challenges arising during the documentary credit examination phase,mainly in respect of wrong or spurious refusals of presentations made under a documentary credit subject to UCP 600.
It has been said that an exporter presenting documents under a documentary credit is under far more pressure than any student sitting for an examination. In order to pass,the exporter must achieve a 100% result on papers submitted. There is no margin for error. A mark of 99% results in failure -- failure to comply with the terms and conditions of the credit.
In this case "failure" has both actual and potential consequences. An actual consequence is that the issuing bank and/or confirming bank are not obligated under their undertaking towards the beneficiary. That is the cost of having the documentary credit issued and "lost." Perhaps worse is the potential consequence that payment is received late - or not at all.
No doubt making a complying presentation is difficult. What makes it even more difficult is that banks often apply a standard not in line with that of the UCP 600.
Under the UCP 500 the documentary examination standard was worded as follows in Article 13 (Standard for Examination of Documents):
"A. Banks must examine all documents stipulated in the Credit with reasonable care,to ascertain whether or not they appear on their face to be in compliance with the terms and conditions of the Credit. Compliance of the stipulated documents on their face with the terms and conditions of the Credit,shall be determined by international standard banking practice as reflected in these Articles. Documents which appear on their face to be inconsistent with one another will be considered as not appearing on their face to be in compliance with the terms and conditions of the Credit.
Documents not stipulated in the Credit will not be examined by banks. If they receive such documents,they shall return them to the presenter or pass them on without responsibility."
Not surprisingly,this standard gave rise to many disputes. It simply was hard to agree on how to apply this in practice. What does "appear on their face to be inconsistent with one another" actually mean?
This is one of the reasons why the ISBP ( International Standard Banking Practice - a checklist for standardized banking practices) was made - and why,when the earlier UCP 500 standard was revised,UCP 600 article 14(d) was drafted.
UCP 600 article 14(d) reads: "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."
This article actually sets the scene for how to compare data between the documentary credit and the documents as well as between the documents. There are 3 critical phrases:
Data must not conflict
Data need not be identical
Data must be read in context
It is given that this is not a "strict compliance rule," and it is now complemented by good examples from ISBP 745 on how it must be applied in practice:
¡¤ Paragraph A1 allows for "generally accepted abbreviations"
¡¤ Paragraph A23 indicates that a spelling mistake that is clearly a spelling mistake does not in itself create a conflict. However a spelling mistake that affects the meaning of a word or the sentence in which it occurs,such as in a model number,creates a conflict - and is deemed discrepant.
¡¤ Paragraph C3 Indicates that the goods description in the invoice need not be stated identical as in the documentary credit,but may be stated in different areas in the invoice.
¡¤ Paragraph L5 indicates that although a bill of lading is issued "to order of the issuing bank" the same need not be stated as a consignee in the certificate of origin.
In fact UCP 600 sets out a rather effective check:
It requires that data be compared - and the data must not "conflict." However,it need not be identical (that is no refusals on obvious spelling mistakes),and above all it must be read in context. It has been said that document examiners should not act like robots,and that the document examination is not a matter of a computer algorithm. The "context rule" addresses that. The "potential" conflict of data must be evaluated against the context in which it appears.
Incorrect Application of the UCP 600 Standard
It seems there is a problem in how banks are applying the UCP 600 standard. There simply are too many wrong and spurious discrepancies quoted by issuing banks and confirming banks.
To substantiate this view outset has been taken in in the ICC Opinions from the 2 latest ICC Banking Commission meetings. That was from meetings that were to be held in Paris in November 2015 (cancelled due to the terrorist attacks in Paris),and in Johannesburg in April 2016.
For the purpose of the Paris Opinions,nine discrepancies were evaluated. In all nine cases the issuing bank was proven wrong. For the Johannesburg Opinions,the picture is the same: four discrepancies were evaluated,and in all cases the issuing bank was proven wrong.
In other words,l