Interpreting the UCP

1 Introduction

The role of documentary letter of credits (DLCs) in international trade is well known. The credit of a bank is substituted for that of a buyer of goods or services. The beneficiary/seller cannot be paid until the bank receives documents confirming supply and shipment of the goods. The credit deals entirely with documents and is independent of the underlying contract.

In the simplest case, only the three parties, the buyer, the seller and the issuing bank are involved. In real life, other parties, usually banks, become part of the transaction. The issuing bank will usually request a bank in the seller's country to advise the credit, that is, inform the seller of the terms of the credit and its availability.

The seller may present documents at any nominated bank, usually a named bank, a class of banks or, indeed, any bank at all. The nominated bank may simply forward documents to the issuing bank or may take on more onerous obligations.

In the extreme case, the nominated bank may become a confirming bank, undertaking obligations to the seller similar in all respects to that of the issuing bank.

In other words, a typical DLC transaction may involve many parties with complex interlocking obligations. Because of the international character of DLCs, all parties have an interest in the establishment of a uniform governing law.

The International Chamber of Commerce (ICC), a coalition of industrialists, financiers and traders, was formed in 1919. The ICC's early efforts were directed toward questions of reparations and war debts, but soon moved on to questions of international trade.

The ICC issued the first version of the Uniform Customs and Practice for Documentary Credits (UCP) in 1933.1 The UCP purported to govern the relationships in a DLC transaction. Although not having the force of law, the UCP was intended to be incorporated into the credit so as to be binding contractual terms.

The first UCP was not a great success. The UK and other Commonwealth banks refused to use the terms. The first major revision of the UCP was in 1962 and was accepted by the UK and Commonwealth banks. Further revisions followed in 1974, 1983, 1993 and, the current revision, 2007. The 2007 revision is also known as the UCP600, named after the ICC publication number.

2 Incorporation by reference

The UCP are incorporated into a documentary credit by reference. The UCP itself mandates this procedure in Article 1, stating that the UCP are rules that apply to a credit when the text of the credit expressly indicates that it is subject to the rules.

The problem with incorporating rules by reference is that the imported terms may conflict with the express terms of the importing document. In a perfect world, this would not happen, but real life drafting pressures mean that it often happens.2

The courts have developed general guidelines for dealing with conflicts when terms are incorporated by reference. The first step is to make sure that there really is a conflict. It is the duty of the court to do its best to reconcile the apparently conflicting terms.3 In fulfilling this task, Bingham LJ noted:4

It is not enough if one term qualifies or modifies the effect of another; to be inconsistent a term must contradict another term or be in conflict with it, such that effect cannot fairly be given to both clauses.

For example, a force majeure clause will inevitably qualify the apparently absolute obligation contained in other terms of the contract, but there is no inconsistency.

It may not be easy to determine if there is an inconsistency. In Leonie's Travel Pty Limited,5 Moore J found that there was an inconsistency between the terms of the incorporating document and those of the incorporated document. On appeal, the full court held that there was not an inconsistency and that the two clauses in question could be read together.6 The full court's decision was based, in part, on the consideration that the documents in question were international commercial documents and that every effort should be made to maintain consistency of interpretation with other common law courts.7

If there is an irreconcilable difference, then the general rule is that the express terms of the contract will prevail over the terms included by reference.8 This rule makes sense when the document consists of terms discussed and agreed upon by the parties but the incorporated document is a standard form contract. However, if both the incorporating and the incorporated documents consist of standard terms, then the argument is not as obvious.9

3 Implied terms and construction

The Australian rule on implied terms was established by the Privy Council in BP Refinery (Westernport) Pty Ltd v Hastings/10 and approved by the High Court in /Codelfa Construction Pty Ltd v State of New South Wales.11 The rule is that a term will only be implied if five conditions are satisfied:

  • the term must be reasonable and equitable;
  • it must be necessary to give business efficacy to the contract;
  • it must be so obvious that 'it goes without saying';
  • it must be capable of clear expression; and
  • it must not contradict an express term of the contract.

The Privy Council itself has recently rejected this formulation in Attorney General of Belize v Belize Telecom Ltd,12 where it said (at para 21):

There is only one question: is that what the instrument, read as a whole against the relevant background, would reasonably be understood to mean?

The Board considered that the itemised list was merely different ways of looking at this basic question, and that there was some danger in giving each item a 'life of their own'.13 As an example, the Board noted that a contract might work perfectly well in the sense that each party could perform their express obligations, but that the result would contradict 'what a reasonable person would understand the contract to mean.'14

An example of this might be found in Greenhill International Pty Ltd v Commonwealth Bank of Australia.15 The bank made a 'silent confirmation' agreement with the beneficiary of a DLC. When the issuing bank wrongfully refused to honour the credit, the defendant bank sought recourse under the silent confirmation agreement but without seriously attempting to first recover from the issuing bank.

Costello J, using the BP test, found an implied term that the bank would make an attempt to recover from the issuing bank before seeking recovery from the beneficiary. However, it is clear that the contract 'worked' without such an implied term. It was not, however, what a reasonable person would have expected. The Attorney General of Belize test seems to give a more natural solution to the problem.

In Fortis Bank v Indian Overseas Bank,16 the UK Court of Appeal said (at para 55):

there would be real difficulties in using a rule of national law as to the implication of terms (if distinct from a method of construction) to write an obligation into the UCP.

In spite of this, terms have been implied into the UCP. In Seaconsar Far East Ltd v Bank Markazi,17 the issue turned on Art 16(d) of the 1983 Revision which states that when a presentation is rejected for non-compliance, the bank:

…must give notice to that effect without delay by telecommunication or, if that is not possible, by other expeditious means…

The UK Court of Appeal found an implied term that a spoken notice to an official of the issuing bank who was present was sufficient.

Article 16(c) of the 1983 revision of the UCP provided that the bank had 'reasonable time' to inspect documents. The Court in /Bankers Trust Co v State Bank of India/18 found an implied term that the period of 'reasonable time' included the extra time to consult its customer to see if customer willing to waive any discrepancies. The issue itself is no longer relevant since the UCP600 replaces 'reasonable time' with a fixed time of 5 banking days: Art 14(b) and 16(b), UCP600.

4 Return of documents: Fortis

The line between finding an implied term and 'construction' of the contract is a fine one. The difference was emphasised in Fortis Bank v Indian Overseas Bank.19

The issuing bank refused payment, claiming the presentation of documents was non-complying. Documents were rejected in early November, 2008 but not returned until mid-February, 2009.

At issue in the Fortis case was the application of Art 16(f):

If an issuing bank or a confirming bank fails to act in accordance with the provisions of this article, it shall be precluded from claiming that the documents do not constitute a complying presentation.

The relevant part of Article 16(c) required the issuing bank to notify Fortis of its intentions regarding the disposition of the documents. The issuing bank notified Fortis that it was returning the documents, but did not do so.

Unfortunately, Art 16 does not explicitly require the return of documents or that the issuing bank comply with the notice. Hamblen J found that a proper construction of the UCP required the bank to do what it said it was going to do, that is, return the documents.20 Importantly, he also held in the alternative that there was an implied term in the UCP requiring the bank to act in accordance with the Art 16(c) notice.

The UK Court of Appeal found that, as a matter of construction, Art 16 contains such a requirement. It based its finding on three principal arguments:

  • evidence from experts on actual banking practice showed that return of documents was expected within a reasonable time;
  • it is illogical to allow the bank to retain the documents after it has rejected them;
  • for letters of credit to work properly, the presenter must have the documents returned in order to deal with the goods; it is the only construction that makes commercial sense; and
  • Art 16(e) would be unnecessary if there were no obligation to return the documents.

Art 16(e) provides that a bank may, instead of complying with the terms of its notice to hold the documents, may instead return them.

The Court went to some lengths to emphasise that the finding was one of construction, not the implication of terms imposing an obligation.

5 Conclusion

The incorporation of the UCP into credits means that national courts will be required to interpret its terms. The following principles emerge:

  • the UCP will be interpreted according to the law of the forum;
  • however, where possible, the interpretation will conform with that of other jurisdictions;
  • the agreement between the bank and the beneficiary should be construed to avoid conflicts where possible;
  • if a conflict is found, the terms of the express agreement will usually prevail over those of the UCP;
  • construction is preferred to finding implied terms; but
  • there is no obstacle to finding implied terms in the credit or in other agreements between the local bank and the beneficiary;
  • in practice, the factors used to aid in construction will be the same as those used to find an implied term.



See E P Ellinger, The Uniform Customs and Practice for Documentary Credits (UCP): their development and the current revisions, (2007) 2007 LMCCLQ 152 for a brief history of the development of the UCP.


The UCP itself contains numerous terms directed toward preventing conflicts: see, for example, Art 4(c) directing banks to 'discourage' the inclusion of contractual terms into the credit; see also Alan L Tyree, UCP: art 14(h), (2008) 19 JBFLP 209.


Societe Generale, London Branch v Geys [2012] EWCA Civ 307; Pagnan SpA v Tradax Ocean Transportation SA [1987] 3 All ER 565; Leonie's Travel Pty Limited v International Air Transport Association [2009] FCA 280.


Pagnan SpA v Tradax Ocean Transportation SA [1987] 3 All ER 565 at 575.


[2009] FCA 280.


Leonie's Travel Pty Ltd v Qantas Airways Limited [2010] FCAFC 37.


at para 48ff; citing Great China Metal Industries Co Ltd v Malaysian International Shipping Corp Berhad [1998] HCA 65; note however that Gummow J seemed to discount the principle when refusing leave to appeal: Qantas Airways Limited v Leonie's Travel Pty Limited [2010] HCATrans 232.


Ford Motor Company of Australia Ltd v Arrowcrest Group Pty [2002] FCA 1156; Vella v Permanent Mortgages Pty Ltd [2008] NSWSC 505;


See Leonie's Travel Pty Limited v International Air Transport Association [2009] FCA 280 per Moore J at para 56.


[1977] HCA 40.


[1982] HCA 24.


[2009] UKPC 10.


at para 22.


at para 23.


[2013] SADC 7; see the discussion of this case in Alan L Tyree, Silent confirmation of credits, (2013) 24 JBFLP 126.


[2011] EWCA Civ 58.


[1998] EWCA Civ 1356.


[1991] 1 Lloyds Rep 587.


[2011] EWCA Civ 58.


Fortis Bank SA & Anor v Indian Overseas Bank [2010] EWHC 84 (Comm); see, in particular, para 48ff.

Author: Alan L Tyree

Created: 2013-11-12 Tue 09:42

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