FEATURE - The Institute of International Banking Law & Practice

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FEATURE use of standbys is common in bad economic times to transfer risk. Panelists referenced CTFC v. Vandeveld (noted at Nov/Dec 2007 DCW 21). This was an investor fraud case where it was promoted that since the investment was backed by a standby letter of credit, the investment was risk-free. In his research, BYRNE added that he has seen an increase in prime bank scams, high-yield programs, and misuse of the words “standby letters of credit” in certain transactions. Issues in UCP600 To begin this panel discussion, moderator Buddy BAKER first reviewed commonly-referenced problems with UCP500, including: High discrepancy rates; The original documents controversy; Clean but “unmerchantable” transport documents; Improper refusals; and Fraud and deferred payment undertakings. He next summarized major changes made in the revision to UCP600, including: The time of honor or dishonor from seven days to five days (UCP600 Article 14(b)); The addresses of applicant and beneficiary need not match [those stated in the credit] (Article 14(f)); issuing bank allowed to rescind refusal of documents (Article 16(c)(iii)(b)); Nomination authorized discounting of deferred payment (Article 12(b)); Consistency requirements restated (Article 14(d)); Lost documents (Article 35); The revised definition of negotiation (Article 2); and Bill of lading means port-to-port (Article 20). BAKER then identified areas of concern which might be viewed as problems with UCP600, including: Is there still a reasonable time standard (UCP600 Article14(b)); Discrepant documents presented under a transfer credit (Article 38(i)); Documents created using laser printers and scanned signatures (Articles 17(b), 17(c), and 28(a)); Deemed acceptance of amendments (Article 10(c)); How the procedure for lost documents will actually function (Article 35); and Banks excluding certain UCP600 articles. Regarding exclusion clauses, some bankers have seen UCP600 Article 35 as a common choice for exclusion. WILLS stated that SWIFT has changed to accommodate the new rules such that the issuing bank has to specifically choose the rules to which the credit is subject. (Before the change, the default was UCP500.) One banker mentioned that she has seen credits subject to UCP600 in Field 40E, but that exclusions are given in Field 47 (Additional Conditions). Panel members next mentioned that in order to take advantage of the protections afforded in UCP600 Article 12(b), a bank has to act under the scope of its nomination. ICC Opinion TA655 relates to this issue. In this Opinion, a nominated bank sent a message to the advising bank stating: “Please be informed that the documents are accepted by us for maturity date June 05, 2008 (Jun 04, 2008 is a holiday in our country). At maturity date we will revert to the matter of payment of proceeds.” When asked to clarify the last sentence, the nominated bank replied: “As the credit was not confirmed by us, we are not in a position to guarantee payment at the maturity date.” The query to the ICC was whether the nominated bank had deemed to have incurred its deferred payment undertaking because the message stated that the documents had been accepted by the nominated bank and also gave the maturity date. The ICC said no, that the message meant that the presentation was compliant. Panelists foresee there will be more questions about deferred payments in the years ahead. They cautioned banks to be very careful about wording on claims and presentation cover letters so that they don’t give the impression that they have incurred their own obligations 22 Documentary Credit World May 2008
FEATURE when they haven’t. Others added that the message doesn’t matter that much because the bank hasn’t obligated itself on its books. One delegate said that use of the word “accept” is unacceptable and is similar to sending “documents under collection”. Bankers within the Americas need to be aware that around the world the first language is not English. One panelist expressed concern that banks won’t make the necessary adjustments on their books for a direct (rather than contingent) liability. If the bank doesn’t make the entry, it will lose in court. One panelist asked the audience if they would incur a deferred payment undertaking if the credit is not confirmed. Some banks indicated they would do so if there was a credit line available [for the issuing bank]. Others will do it if the customer asks and if it is a “big” customer. Some customers don’t want to pay a confirmation fee up front and are willing to take the chance that the line is available at the time of presentation. In such instances, does the bank use a disclaimer in its advices Responses were mixed. For one bank, it will not advise a credit with drafts drawn in it. Instead, it will revert to the issuing bank to have the drafts drawn on the issuing bank. Another bank will install a clause that will treat this as an unconfirmed deferred payment credit and will make payment when they receive it. One panelist reported that banks in Germany and Turkey do not want anyone to discount their deferred payments. Instead of making the credit available with themselves, they simply exclude UCP600 Articles 7(b) and 7(c). Another panelist cautioned that any bank acting under their nomination with this language in the credit is taking on incredible risk. The purpose of this language is to restrict presentation and payment at their own counters. There is no obligation to inform the beneficiary on the cover letter of exclusions and panelists advised delegates to refrain from doing so. Other panelists questioned what excluders think they are getting. He used the exclusion of UCP600 Article 7(c) as an example. Per United States law, Article 7(c) is not necessary because a Hong Kong Singapore 2008 Annual Survey of LC Law & Practice reimbursement is expected if a bank acts pursuant to its nomination. One panelist contends that if banks refuse to advise or confirm credits with such exclusions, then issuing banks will stop making these exclusions and it will diminish this bad practice. With regard to exclusion of UCP600 Article 35, one panelist noted that an issuing bank can challenge the presenting bank to prove that the documents complied and that they were lost. In this manner, before the issuing bank reimburses, it can confirm that this was done. Given today’s technology, one panelist was curious about how banks treat scanned documents to see if such documents are originals. One delegate added that exporters can go to a carrier’s website and print out bills of lading, so how do banks know that these documents are originals and not photocopies There are no simple answers and the same holds true for standby The Premier LC Event of the Year is Coming to Asia in July! Click on logo for details or see page 47. May 2008 Documentary Credit World 23
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FEATURE - The Institute of International Banking Law & Practice

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