Modifications and exclusions explained
Since the inception of Uniform Customs & Practice for Documentary Credits (UCP 600), trade finance professionals, in particular the Letter of Credit (LC) community, have been discussing the need for and consequences of modifications and exclusions to the rules in commercial LCs issued under UCP 600.
In the LC parlance, altering the envisaged intent of rules or practices either by rewording the rules or by stating that a particular rule or subset of rules do not apply, is loosely termed modification and exclusion.
UCP 600 allows for exclusions or modification of the rules much like UCP 500. The phrase “…unless expressly modified or excluded…” in Article 1 of UCP 600 affects every other article of UCP 600, meaning that any article of the rules could be modified or excluded.
This made the phrase “…unless otherwise stipulated in the credit”, which appeared in many articles of UCP 500, redundant and they were, therefore, eliminated in UCP 600. The drafting group of UCP 600 opined that it significantly improved the style and readability of the rules.
No set of transnational rules can anticipate every scenario that the rules will be applied to, meaning they are designed to target the widest audience possible. In doing so, the rules often purposely leave some scope to amend or modify provisions to accommodate peculiar circumstances.
An example would be a situation where the transit time of a shipment is very short, for instance, 15 days. If an LC allowed for the default maximum presentation period of 21 days (Article 14 ( c ) of UCP 600), and the seller indeed takes 21 days to present the documents to the nominated bank, the goods will have arrived at the destination much earlier than the documents, likely leading to demurrage. This is one of many situations that would necessitate modification of rules.
Simply put, the provisions of UCP 600 can be modified or excluded by inserting a suitable statement in the text of the LC. SWIFT, which is the preferred method (particularly in international trade) of routing LC’s and other instruments, has set designated message types for each of those instruments.
One such message standard is the MT 7 series, which is used for LC’s and guarantees. MT 700 is used for the issuance of LC’s and has designated fields with preset meanings. For example, Field 48, which is an optional field, is used for setting presentation period – setting it to a value other than 21 modifies the default position of 21 days as per article 14(C) of UCP 600.
While modifying the value in a specific field may also result in the modification of the default position of UCP 600, more often than not Field 47A (additional conditions) and 46A (documents required) carry this burden. On the other hand, exclusion of an article requires express notation in the LC stating that an article is excluded.
The modifications and exclusions listed below are some examples but is by no means an exhaustive list:
- A clause which we often see is “Should any terms or conditions stipulated in this credit be contradictory to or inconsistent with that of UCP 600, the relative UCP 600 provision(s) is/are deemed expressly modified and/or excluded”. This is a classic case of the statement that we often hear from the LC community “When the LC is silent UCP speaks and vice versa”. This clause, when inserted in the LC, excludes or modifies any provision in UCP 600 that is inconsistent with the LC terms. However, the ICC banking commission does not recommend the use of this clause as it deems it unnecessary to emphasize the wording in Article 1 of UCP 600. Refer ICC opinion [R716/ TA.704rev]
- Inserting a clause in additional conditions “all documents must be presented through beneficiary’s bank”. Changes the default position of article 6(a) of UCP 600 thereby eliminating the beneficiary’s option of presenting documents directly to the issuing bank.
- Exclusion of Article 7(c) & 12(b) of UCP 600: by doing this the issuing bank is nullifying its undertaking to pay the nominating bank (confirming bank in the case that the nominating bank is the confirming bank as well) upon presentation of complying documents. Banks would generally not choose to act upon their nomination in these cases. There is a much simpler way of achieving the same outcome: by making the LC available ‘ONLY’ at the issuing bank’s counter.
- Exclusion of Article 10(c) of UCP 600: Article 10(c) talks about the notification of acceptance of the amendment(s). The default position is that the beneficiary should either communicate their acceptance or rejection of an amendment by express notification or by the presentation of documents that comply with the credit. Until this happens, the credit retains its terms and conditions. Exclusions of this rule will require suitable wording in the LC that specifies the basis on which the acceptance or rejection is to be determined.
- Exclusion of Article 10(f) of UCP 600: While this article reads that any amendment which says that it comes into force unless rejected by the beneficiary within a certain time shall be disregarded in practice, banks have been excluding this rule. This puts the onus on the advising bank not only to promptly deliver the amendment to the beneficiary but also to revert the outcome back to the issuing bank. This becomes more complex in the case of transferable credits.
- Exclusion of Sub-article 14(f) of UCP 600: The exclusion of this article without inserting any other wording in lieu would make the LC unworkable. The nominated bank should clarify with the issuing bank and make sure that they understand to what and how the documents are to be reviewed. The nominated bank would be very hesitant to act on their nomination due to the associated ambiguity.
- The default position of UCP 600 as per article 14(g) is that documents not called for by the LC if presented, are returned at the cost of the presenter but are silent about the treatment of those documents in the context of the sanctions clause. Some banks explicitly state that unrequested documents, if present, will still undergo the sanctions process. Article 14(g) is excluded.
- Inserting a clause in additional conditions “Documents dated prior to LC issuance date not acceptable” changes the default position of UCP 600 Article 14(i) which allows for the presentation of documents dated prior to the issuance date of the LC.
- Article 14(k) of UCP 600 has to be excluded If the importer wants to make sure that the other party they are dealing with is indeed the seller who will supply the goods.
- There are instances where the importer requires manually signed invoices for regulatory reasons (particularly LCs issued by countries in the Indian sub-continent). Such an LC, in field 46A of MT 700 section specifically states “Manually signed….invoices” and has to exclude 18(a)(iv) of UCP 600 and Article C10 of ISBP 745 for this clause to be effective.
- Exclusion of Article 18(b) of UCP 600: there are occasions where the issuing bank(s)/applicant do not wish to face the possibility of an invoice being issued for a greater value although the nominated/confirming bank has not honoured or negotiated for a higher amount than that of the LC. It is in these situations that article 18(b) must be excluded.
The pitfalls of modifications and exclusion
It’s not very hard for an issuing bank to get things wrong, so any LC with modifications or exclusion could be unworkable or require amendment if not drafted with the utmost care.
While some advising banks check the workability of the LC before advising it to the beneficiary, not all banks do. As per Article 9(b) of UCP 600, the advising bank is under no obligation to check the workability of the LC.
The only obligation of an advising bank is to satisfy itself of the apparent authenticity of the credit or amendment received and that the advice to the beneficiary (or the second advising bank) reflects the terms and conditions of the credit or amendment received. That puts the onus on the nominated bank and the beneficiary to ensure that the LC is workable and that the beneficiary can present the required documents in the required form.
While UCP 600 allows for the modification and exclusion of articles, doing so can result in an increase in discrepancies. Taking note of the fact that such exclusions are the subject of queries by the national committees.
ICC released a general statement in this regard, the ICC official Opinion R634 (TA.638rev), which reads that it is not as simple as making a statement in the credit that an article or sub-article is excluded or doesn’t apply. Often a new condition has to be inserted in the credit to compensate for the exclusion. It was recommended that banks keep the number of modifications and exclusions to a minimum. The last line above has also once again been emphasized in ICC official Opinion R716 [TA. 704rev].
While the ICC has done some work to discourage this practice of exclusions that make LC’s ambiguous and unworkable, clearly it is not enough. The number of questions raised and opinions sought from ICC is a testament to this fact.