Strict Compliance: Need not be identical to, but must not conflict with

The expression ‘…to ascertain whether or not they appear, on their face, to be in compliance with the terms and conditions of the credit’ as stated in article 13 of the UCP 500 has been clearly explained in article 14 of UCP 600.

What is written in an invoice for example, need not be identical to what is written in other documents. This is because each document serves a different function and therefore the content or data contained in each of the document differs with each other.

The invoice serves as the accounting document. Packing list on the other hand provides information of the number of packages, weight, mark and numbers. Bill of lading is an evidence of contract of carriage as well as a title to the goods. As such, the content or data in each and every document called for under the letter of credit bound to differ. However, these differences must not conflict with each other and most importantly must not conflict with the data contained in the letter of credit within the context of international standard banking practice (ISBP).

This non-identical allowance suggested by article 14 of UCP 600 is clearly practical in the case where the term Ex-Work is used by the trading parties. Under the term Ex-Work, point of delivery of the goods can either be at the seller’s premise, workplace or factory. To accommodate to the possibility of making a delivery different from the original point as stated in the letter of credit, article 14 (j) allows the invoice issued by the seller to state a different address. For example, if the letter of credit expressly stated the address of the seller as follow:

59: Beneficiary
+Commercial Direct TV
340 Commerce Avenue,

Suite 20 Southern Pines N.C. 28387
United States of America

The invoice may bear a different address which can be the factory or workplace of Commercial Direct TV within the United States of America.

The same is also applicable to the applicant or the buyer. For example, if the letter of credit expressly stated the address of the applicant as follow:

50: Applicant
+Direct TV Business
132 Bangsar Park, Kuala Lumpur
59200 Malaysia

The seller that is Commercial Direct TV may issue an invoice to a different address within Malaysia which may be a branch or workplace of the applicant or buyer that is Direct TV Business.

However, when the applicant or buyer appears as a notifying party or part of the consignee on a transport document, the details of the applicant or buyer must be as stated in the letter of credit. Referring to the above example, the detail of the applicant should read as ‘Direct T V Business, 132 Bangsar Park, Kuala Lumpur, 59200 Malaysia’.

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.

Presentation of documents

A freely negotiable LC with the expiry date on the 01st of December, 2007. Beneficiary presents the documents to his bank in his country on 30th of November 2007. The documents are not negotiated but instead redirected to the issuing Bank by courier service and reached the issuing Bank on the 05th of December, 2007.

Is the LC deemed to be expired? Is it a discrepancy?

One participant from India suggested that it is a discrepancy because the LC reached the Issuing Bank after the 01st of December, 2007.

Article 2 of UCP600 states that “presentation means either the delivery of documents under a credit to the issuing bank or nominated bank or the documents so delivered”.

In layman term, the beneficiary has the option, either to send the documents to his bank or to the issuing bank if the issuing bank is also in his country. In the case where trading parties domicile within the same country or within the same vicinity, the beneficiary may send the documents directly to the issuing bank. For example, the LC is issued by Maybank, in Kuala Lumpur that is the buyer’s bank and the seller is also in Kuala Lumpur where he maintains an account with Stanchart which also in Kuala Lumpur. The beneficiary may either send the documents directly to the issuing bank, that is Maybank or he may also send the said documents to his bank that is Stanchart. When the documents reached the counter either one of these banks, he is said to have made a ‘presentation’ and therefore, he owes no further obligation as far as presentation is concerned.

Article 6(d)(i) of UCP 600 clearly states that "...an expiry date stated for honour or negotiation will be deemed to be an expiry date for presentation..." Article 6(d)(ii) further states "...the place for presentation under a credit available with any bank is that of any bank..."

From this point onwards, responsibility shifts to the nominated bank to examine the documents to determine whether or not the documents comply with other terms and conditions of the LC. It may take 1 day, 2 days or more but not to exceed 5 banking days.

To escape refusal by bank, the beneficiary must also ensure that the documents reach the bank within the validity of the presentation period which is within the expiry date of the LC.

Upon receipt of the said documents from the nominated bank, the issuing bank must first establish the date on which the presentation was made at the nominated bank. This is only a matter of checking the date on the covering schedule provided for by the nominated bank. The date indicated on the covering schedule is deemed to be the date on which the presentation is made at the nominated bank. This is the routine process in checking the documents by banks. If the indicated date is before the expiry of the LC, it is not a discrepancy.

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Examination of documents under LC

The principle of strict compliance is ruled by articles 14, 15 and 16 of the UCP 600. Article 14(a) obliges the bank to examine all documents stipulated in the credit to ascertain on the basis of the documents alone, whether or not they appear, on their face, to constitute a complying presentation. That is 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 the UCP 600. Therefore 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.

That standard is applicable only for stipulated documents; documents which are not stipulated will not be examined and shall be returned to presenter or be passed without responsibility. Banks shall have reasonable time for examination, not to exceed five banking days following the day of receipt of the documents, and for determination whether to take up the documents or to refuse payment. Banks will deem conditions as not stated and disregard them if a credit contains such conditions without stating the documents to be presented.

Banks, which can be the issuing bank, the nominated bank or the confirming bank, must determine of the documents alone whether or not they appear on their face to be in compliance with the terms or not. If they appear not to be in compliance, banks may refuse to take up the documents. The bank hereby has got latitude when judging, which it need because not every error leads to a rejection and many problems can be solved by communication between bank, applicant and beneficiary. But the bank is obliged to decide on its own. If the issuing bank determines documents to be not in compliance, it may in its sole judgment approach the applicant for a waiver of the discrepancies.

Article 16(f) rules that if the issuing or the confirming bank fail to act in accordance with the provisions provided for in Article 16, they shall be precluded from claiming that the documents are not in compliance with the terms and conditions of the credit.

The issuing bank and a confirming bank are not relieved from any of their obligations or provisions of article 16. Banker´s examination consists of three steps:

the completeness of the stipulated documents,
the compliance on their face and if they are in accordance with each other and
the terms and conditions of the letter of credit.

Documents are complete if all stipulated documents are presented and if each document contains the stipulated number of duplicates. The compliance ‘on their face’ means that there must not be obvious falsifications and errors. The documents are in accordance with each other if they do not contain contradictions.

UCP 600

Effective July 2007, UCP 500 will be no longer effective in governing the application and operations of Letter of Credit. UCP 600 will be the new governing set for all parties concerned; bankers, traders, transport operators, insurance companies, lawyer etc.

One of the major changes is article 14(b). This new article defines the number of days required to hold the documents for processing or examining by banks. The ‘reasonable time’ in article 13(b) of UCP500, as expected, has been eliminated and replaced with a definite 5 banking days in UCP600. Now, the issuing bank, nominated bank or confirming bank (if any) shall each have a maximum of 5 banking daysto process, examine and determine whether the documents are in compliance with the terms and conditions of the LC. If the documents are to be rejected, the notice to this effect must also be made within this new time frame.With this new change, trading parties, buyer and seller can expect faster payment.

In addition to this, articles 16(c)(iii)(a) and 16(c)(iii)(d) provide comfort to the seller where seller has a control over the discrepant documents.In the event the bank refuses the documents due to discrepancies, it will hold the documents pending further instruction from the presenter on how to dispose the documents. Seller may also provide such instruction at the time of tendering documents to his bank. In this condition, even if the bank has decided to refuse payment, the bank somehow will act in accordance to the instruction given by the presenter. The bank either waits for the instruction from the presenter while waiting for the buyer to waive the discrepancies or acts accordingly to the instruction given by presenter on the covering schedule. This new article however may expose buyer to a new threat or rather create an opportunity to the seller when dealing with commodities. When price has appreciated and documents are discrepant, seller may not want to release the documents to the buyer.