The Introduction of Article 12(b) in the UCP 600

OPINION: [2009] J.I.B.L.R. 285OPINIONThe 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 art.12(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.’’∗ Professor of Law at the DoshishaUniversity Law School, Japan. 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 comments.Any errors are solely mine.1 e.g. Michael Isaacs & Michael Barnett,‘‘International Trade Finance—Lettersof Credit, UCP 600 and Examination ofDocuments’’ 22 (12) (2007) J.I.B.L.R.660, 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)J.I.B.L.R. 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). cf. For critical views, see,e.g. 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 E.R. (Comm) 776 CA. For asummary of the facts and decision, seeEbenezer Adodo, ‘‘The Legal Effect ofNomination under the New UCP 600’’23 (4) (2008) J.I.B.L.R. 231 at [234].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. 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 maturity.This provision has been widely welcomed as facilitating trade financefor the beneficiary who wishes to shore up its cash by obtaining adiscounted payment of credit. 1 This article, however, casts doubt whetherthe introduction of art.12(b) should be seen as a step in the right direction.The reason is that, as detailed below, it has effectively eliminated a usefuloption of risk allocation.Prior to the introduction of art.12(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. 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 art.12(b) of the UCP 600, it does nothave a requisite mandate to pay before maturity. The well-known decisionof the English Court of Appeal in Banco Santander SA v Bayfern Ltd 2confirmed this point under the UCP 600 and it is submitted that thedecision accords with legal logic. 3 The soundness of its reasoning is attestedby the fact that in other countries, too, judgments had been renderedon the same basis, such as the Singaporean decision of Credit AgricoleIndosuez v Banque Nationale de Paris 4 and the South African decision ofVereins-und Westbank AG v Veren Investments. 5 This 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 fraud.Furthermore, 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 maturity. 6 On the other hand, in the case of a negotiationcredit, since the nominated bank is authorised to negotiate, i.e. purchase[2009] J.I.B.L.R., ISSUE 6 © 2009 THOMSON REUTERS (LEGAL) LIMITED AND CONTRIBUTORS

motion for order to show cause that was served on you. Print the name of themotion on the blank line. You do not need to check the box next to “hearing requested.” A hearing hasalready been scheduled. The date time and place of the hearing are in theorder to show cause. Paragraph (1): State the facts relevant to the motion that are within the firsthandknowledge of the person signing the statement. This means the personmust have observed the facts personally, rather than being told about thefacts. Paragraph (2): List and attach any documents you want to use to support thefacts. Paragraph (3): You do not need to check the box next to “hearing requested.”A hearing has already been scheduled. The date time and place of thehearing are in the order to show cause. Attach any required documents and forms. Date and sign the form. Complete the Certificate of Service. Serve the form and any attachments on the other party by one of the methodsdescribed in the certificate of service. URCP 5 governs service. File the original form, attachments and certificate of service with the judicialservices representative.(2) Reply Statement (if applicable)If you file a Statement Opposing the Motion, the other party may file a Reply,but only to respond to something being raised for the first time in youropposing statement. If the opposing statement and its supporting documentsmerely make statements of fact and legal arguments against the points madein the motion, then the other party cannot file a Reply. The Reply must be filedand served at least 3 business days before the hearing.(3) Attend the HearingAll motions decided by a commissioner will be decided after a hearing, unlessthe parties agree to the motion.Be sure to attend the hearing. If you fail to attend, a judgment may be enteredagainst you and the commissioner or judge may find you in contempt of court.For more information, see our webpage on Going to Court.2014.04 2

OPINION: [2009] J.I.B.L.R. 28711 Requiring the tender of certaindocuments such as a quality certificateissued by a reputable institution wouldgo some way towards protecting againstfrauds but is not a cure-all solution inthe face of a determined fraudster.12 See art.1(2) of the UCP 600.13 Robert Parson, ‘‘UCP 600 A NewLease of Life for Documentary Credits?Part 1’’ 9–1 (2007) Finance and CreditLaw 1, 3.14 In relation to Banco Santander SA vBayfern Ltd [2000] 1 All E.R. (Comm)776 CA, see Daniel Aharoni & AdamJohnson ‘‘Fraud and DiscountedDeferred Payment DocumentaryCredits: The Banco Santander’’ 15(2000) J.I.B.L.R. 22 at [25]; in relation toCredit Agricole Indosuez v BanqueNationale de Paris [2001] 2 S.L.R. 1,see Soh Chee Seng, ‘‘Deferred PaymentLCs Re-Visited’’ (May 2001)Documentary Credit World 29 (thoughdisapproving the decision itself).reflect the practice or to wait for the practice to be brought in line withthe rules. As the full title of the UCP, ‘‘Uniform Customs and Practicefor Documentary Credits,’’ implies, it should usually be the rules whichshould be adjusted to the practice. However, in the present context, it mustbe doubted whether the introduction of art.12(b) was a step in the rightdirection.[2009] J.I.B.L.R., ISSUE 6 © 2009 THOMSON REUTERS (LEGAL) LIMITED AND CONTRIBUTORS