Installment drawing under article 32 of UCP 600
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UCP 290: 1974 |
UCP 400:1983 |
UCP 500: 1993 |
UCP 600:2007 |
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Article: 36 If shipment by installments within given periods is stipulated and any installment is not shipped within the period allowed for that installment, the credit ceases to be available for that or any subsequent installments, unless otherwise specified in the credit. |
Article 45: If Drawings and/or shipment by installments within given period are stipulated in the credit and any installment is not drawn and /or shipped within the period allowed for that installment, the credit ceases to be available for that or any subsequent installments, unless otherwise stipulated in the credit. |
Article 41: If drawings and/or shipments by installments within given periods are stipulated in the Credit and any installment is not drawn and/or shipped within the period allowed for that installment, the Credit ceases to be available for that and any subsequent installments, unless otherwise stipulated in the Credit. |
Article 32: If a drawing or shipment by installments within given periods is stipulated in the credit and any installment is not drawn or shipped within the period allowed for that installment, the credit ceases to be available for that and any subsequent installment. |
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Reason For changes: From UCP 290 to UCP 400: During the lifetime of UCP 290, although issuance of standby letter of credit was allowed under the framework of UCP 290, the term standby letter of credit was not specifically mentioned in the text of UCP 290. ICC incorporated the standby letter of credit practice under UCP 290 framework through providing a banking commission opinion in March 1977. The first reference to standby letters of credit into the text of UCP was found in UCP 400. Article 1, and subsequently carried forward to it successors.
UCP 400 Article 45 was amplified in its reference to "drawings" because the revision also incorporated "standby credits". Case study of UCP 400, Case no. 140 was also uplift the same position, Summery of Fact of Case study 140 on UCP 400: The issuing bank disagreed for the following reasons: a) UCP 290 Article 36 on shipment in installments specifies that if one installment is not shipped within the prescribed period, the credit ceases to be available for further shipments.
Answer As the credit was issued under UCP 290; no note can be taken of changes in the 1983 Revision. In any case, UCP 400 Article 45 was amplified in its reference to "drawings" because the revision also incorporated "standby credits". Reason for Change between UCP 400 and UCP 500: No change has taken place Reason for Change between UCP 500 and UCP 600: No factual change has taken place and remain same exactly what its predecessor was, except: omitting “unless otherwise stipulated in the Credit”. From the above historical fact, we can reach in a conclusion that addition of the word “Drawing” is nothing but a result of incorporation of standby letter of credit into the text of UCP. |
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Impact of Drawing in commercial letter of credit practice:
Now we try to analyze the following situation to determine whether subsequent presentations [although complying] cease to available due to first presentation is not made within stipulated timeframe of the credit, i.e. late presentation:
A Typical example:
Credit stipulated:
A credit stipulated the following shipment
schedule:
1. 1st Shipment must be made within 1st July’08 to 10th July ’08.
2. 2nd shipment must be made within 11th July ’08 to 20th July ’08
3. Final shipment must be made within 21st July ’08 to 30th July ’08.
Credit
available:
at the counter of issuing bank by sight payment.
Additional condition: Document must be presented within 15 days from the
date of Shipment.
Shipment effect by the beneficiary:
1st shipment = 5th July 08
2nd shipment = 15th July 08 and
3rd shipment = 25th July 08.
Presentation of
document:
Beneficiary presented document under the following manner:
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Document presented for 1st shipment at the counter of issuing bank as on 26th July 08 [ late presentation]
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Document presented for 2nd shipment at the counter of issuing bank as on 27th July 08
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Document presented for 3rd shipment at the counter of issuing bank as on 30th July 08.
Fact:
On 1st presentation:
Issuing bank raised discrepancy i.e. late presentation [emphasis added]
Query:
Will the subsequent drawing ceases to be available?
Analysis:
Theoretical analysis:
From the history of UCP 400 to UCP 600, we come to know that “Irrevocable” nature of a letter of credit has been gradually upgraded in the UCP from its predecessors. Current version of UCP e.g. UCP 600 is the latest improvement in the field of “Principle of Irrevocability.” The following sub-articles are major witness of above development.
According to article 2 Definition of UCP 600:
“Credit means any arrangement, however named or described, that is irrevocable and thereby constitutes a definite undertaking of the issuing bank to honor a complying presentation”
This “Irrevocable” position of letter of credit is also emphasized by incorporating a principle at article 3, Interpretation:
“A credit is irrevocable even if there is no indication to that effect”
The spirit of irrevocable nature of letter of credit has also uplifted in sub article 10(a) of UCP 600:
“Except as otherwise provided by article 38, a credit can neither be amended nor cancelled without the agreement of the issuing bank, the confirming bank (if any) and the beneficiary”
Since “Principle of Irrevocability” is the heart of each and every letter of credit transaction under the framework of UCP 600, all parties [especially issuing bank, nominated bank acting on its nomination or confirming bank], engaging in a particular letter of credit transaction must ensure that its role will not demolish this principle [“principle of irrevocability”].
Situational analysis of fact:
In order to analyze the stand of issuing bank regarding right or wrong, first of all, we shall look into the options that issuing have under the framework of article 32 of UCP 600 for the above cases.
Basically the issuing bank’s has two options, such as:
1. This credit will be ceased to be available due to late presentation on the first presentation.
2. This credit will be available for subsequent presentation despite late presentation of first shipment’s document.
Now we analyze the option 1, whether it is conflicted with the “Principle of Irrevocability”
First of all, we have to recognize that if a credit followed by several separate presentations, each presentation will be examined separately in order to determine if presentation is complying. There is no scope to mix up several presentations under a single letter of credit transaction. ICC official opinion has also reflected the same position such as:
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Does accepting discrepant documents mean that a bank has to accept similar discrepancies on future drawings? Official Opinion R332 - 1998/99 From UCP500 - Sub-Article 14(d) |
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QUERY |
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Does accepting discrepant documents mean that a bank has to accept similar discrepancies on future drawings? Query Documents that we had previously presented to an overseas bank were rejected due to the fact that an insurance certificate was presented in lieu of an insurance policy. This discrepancy was accepted by the applicant for the first two shipments. We have now presented a third set of documents which contained the same discrepancy. The overseas bank has notified us that the applicant refuses to accept the documents on the basis of a certificate instead of a policy of insurance being presented. We seek your expert advice as to whether this course of action is acceptable. |
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ANALYSIS/CONCLUSION |
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Analysis and conclusion The fact that a bank may have previously accepted discrepant documents, with or without an applicant waiver, does not bind that bank to accepting a similar discrepancy(ies) on any future drawing(s) unless local law states otherwise. R332 - UCP500 - Sub-Article 14(d) |
The reason behind it also to keep up the “Principle of Irrevocability”. Sub article 7(a) of UCP 600 also stipulates the same position:
“Provided that the stipulated documents are presented to the nominated bank or to the issuing bank and that they constitute a complying presentation, the issuing bank must honor......”
The above sub article reveals that issuing bank’s determination of complying presentation must be solely based on stipulated presented document and under no circumstances that presentation is linked with prior presentations of a same letter of credit transaction [which may or may not be discrepant].
When Issuing bank decided that the presentation in complying, issuing bank must perform its role mentioned in sub article 15(a) of UCP 600:
“When an issuing bank determines that a presentation is complying, it must honor.”
Conclusion:
Consequently, taking option 1, that is ceasing availability of drawing for subsequent complying presentation due to late presentation of first shipment’s document is not only damaged purity of “Principle of irrevocability” but also pushed other basic pillars of UCP into venerable position based on which UCP has been developed and carried forwarded over a period of time.
Finally, from the above analysis, we can infer that Issuing bank should not reject subsequent complying presentation on the plea that the first shipment’s document is presented after stipulated timeframe mentioned on the credit.
A.T.M Nesarul Hoque.