21 December 2007

Reasonableness of 'reasonable time'

Prior to the revision of article 13, UCP 500, the period within which the documents should be check for conformity by banks is set at maximum of 7 banking days. Banks, must exercise ‘reasonable care’ and take ‘reasonable time’ not to exceed the time limit given and provided for in the article.

Effective July 2007, article 13 of UCP 500 is revised (article 14, UCP 600) with a slight different wording where the words ‘reasonable care’ and ‘reasonable time’ are deleted.

The word ‘reasonable time’ has caused many disputes among traders as to what is ‘reasonable time’. How does it determined and who is to determine the number of days so called ‘reasonable’. But of course, this ‘reasonable time’ must not exceed 7 banking days. The maximum number of days, which is 7 banking days is not much of an issue of dispute. The centre of dispute is, is it deemed ‘reasonable’ for banks to consume 2 days, 3 days, 4 days or more within that given maximum period to decide whether or not the documents are compliance. The same applies if bank refuses to take up the documents.

The question now is, is the article 14(b), UCP 600 totally eliminates the same disputes triggered by article 13 of UCP 500? This change, the deletion of the words reduces the disputes among traders. But there is another problem arises which come to almost the same issue caused by article 13 of UCP 500.

The dispute on ‘reasonableness’ again surfaces by virtue of article 1 of UCP 600. The article states that:

“…they are binding on all parties thereto unless expressly modified or excluded by the credit”.

This article causes another debate, what if a bank decides on the second day that the documents are compliant. Can the seller insist on payment on that second day or must he waits until the fifth day for payment?

Can the seller request to modify the clause by inserting words, for example, “…providing for payment within 3 banking days of presentation of the following documents…” in the credit? Is it deemed reasonable to demand payment say, on the second day, third day or forth day?

The survey of court decision on ‘reasonable time’ suggests that depending upon the circumstances, a court’s interpretation of a reasonable time could be firstly, the day of receipt of the documents by the bank, if that were the day when the bank made, or should have made, the decision to reject and dishonour or secondly, a period of time ranged from three days in some decisions, to more than three years in another decisions, regardless of when the decision to accept or to reject the document was made by the bank

Among other criteria on which reasonableness depends are the circumstances of presentation, the type and the value of documents. At one end of the spectrum one may encounter an examination of hundreds of documents. This examination could consume every hour of the five-day period. At the other end, a simple statement of indebtedness of principal or interest concerning a financial Standby Credit may consume no more than a few hours of the examination period.

Premised on the above, banks have the advantage to determine what is the ‘reasonable time’ based upon the circumstances of their operations. If it is customary for that particular bank to process on average, say, 50 documents per day and takes 3 days to decide whether to honour or to refuse, therefore 3 days is deemed “reasonable”. Other banks may take up lesser time or more time to complete checking and to decide. Whatever the case may be, banks should not exceed the time limit given that is 5 days, maximum.

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