Alan L Tyree

UCP600: Article 14(h)

Alan L Tyree*

Abstract: Banks deal only with documents in letter of credit transactions. What should the banker do when the credit requires some condition to be met, but does not specify a document relating to the condition?

1  The problem

The Uniform Customs and Practices for Documentary Credits (the UCP) are a set of rules that apply to any documentary credit when the credit expressly indicates that it is subject to the rules. The current version of the UCP is known as the UCP600. The current version has been in effect since 1 July, 2007.

Article 5 of the UCP states one of the fundamental principles of documentary credits:

Banks deal with documents and not with goods, services or performance to which the documents may relate.

As if to reinforce this, Article 14(h) states:

If a credit contains a condition without stipulating the document to indicate compliance with the condition, banks will deem such a condition as not stated and will disregard it.

Unfortunately, real life credits often contain “non-documentary” conditions, that is, conditions for which there is no document stipulated which would evidence compliance with the condition. How should the banker respond to the non-documentary condition? The simple answer would be to rely on Article 14(h) and ignore the condition. Unfortunately, the simple answer may be wrong.

The problem is the contractual nature of the UCP, and the fact that the UCP itself provides for its terms to be overridden. Article 1 itself states that the rules apply to credits and are binding on all parties “unless expressly modified or excluded by the credit.”

Since the UCP is incorporated into the credit by reference, there is a clear argument that the express terms of the contract, and, in particular, terms indicating non-documentary condition, modify the UCP rules.

2  Banque de l’Indochine

The credit under consideration in Banque de l’Indochine et de Suez SA v J H Rayner (Mincing Lane) Ltd [1983] QB 711 contained a non-documentary provision. The credit had a section entitled “Special conditions”. One of the terms under that heading stated:

Shipment to be effected on vessel belonging to shipping company that member of an International Shipping Conference.

The credit did not specify any document to evidence compliance with the condition. Parker J at first instance held that the bank was obliged to ensure that the condition had been met. Since banks deal only in documents, the bank was entitled to insist upon reasonable documentary proof. This aspect of the judgment was affirmed by the Court of Appeal, Sir John Donaldson MR observing that the condition was “unfortunate”.

The result is also “unfortunate” for the bank, since it calls on the bank to make a judgment call on what kind of documentation is sufficient to show that the condition has been met. While the problem might not be severe for a clause such as that in the Banque de l’Indochine case, more complex conditions might require that the banker know something of the business financed by the credit.

The credit in Banque de l’Indochine was governed by the 1974 revision of the UCP. That version did not contain an article similar to article 14(h) reproduced above. The authors of the seventh edition of Gutteridge and Megrah (1985) believed, at p119, that the problem could be removed by a clause in the UCP similar to Article 14(h).

The UCP was again revised in 1983, the UCP400, but it was not until the 1993 revision, the UCP500, that an clause dealing with non-documentary conditions was introduced. Article 13(c) of the UCP500 provided:

If a Credit contains conditions without stating the document(s) to be presented in compliance therewith, banks will deem such conditions as not stated and will disregard them.

This wording may not be quite as strong as that of the UCP600, but it was thought to do the job. As in the UCP600, the UCP500 also declared that non-stipulated documents could be ignored by the bank.

This change, originally welcomed by the banks, actually leaves the banker in something of a quandary. It is obviously open to the courts to apply the Banque de l’Indochine reasoning, that is, to hold that express provisions in the credit override the terms of the UCP500 or UCP600 which are incorporated only by reference. On the other hand, it is also clearly possible that a court would give full force to the terms of the UCP and thereby permit the banker to ignore the non-documentary terms.

This is not simply a matter of the banker exercising an option. The applicant or the beneficiary will complain if documents are rejected because of non-compliance with a non-documentary condition. The applicant for the credit will complain if documents are not produced which evidence compliance with the non-documentary condition.

3  Kumagai-Zenecon

The defendant bank in Kumagai-Zenecon Construction Pte Ltd v Arab Bank Plc [1997] 2 SLR. 805; [1997] 3 SLR 770 issued a standby letter of credit subject to the UCP500. The letter was to secure payment of the applicant’s judgment debt. As a result of judicial proceedings, the obligation of the applicant was to purchase certain shares “at a fair price to be fixed by independent valuers”. Certain documents were stipulated in the credit, but not a valuers’ report.

The beneficiary made a demand against the credit and presented the documents which were expressly stipulated by the credit, but did not submit a valuers’ report. The bank refused payment, claiming that the presentation did not comply with the terms of the credit.

The court at first instance upheld the bank’s dishonour of the credit, and the Court of Appeal agreed. In both cases, the court noted that the non-documentary condition was inconsistent with the terms of the UCP500. In order to resolve the inconsistency, the courts resorted to the well known principle of construction of contracts that express terms will override terms incorporated by reference.

The court in Korea Exchange Bank v Standard Chartered Bank [2006] 1 SLR 565 approved of the reasoning in Kumagai-Zenecon, but added an unusual twist. The credit in question incorporated the UCP500. Andrew Ang J considered the history and purpose of Article 13(c), noting that its primary purpose was to counter the tendency of issuing banks to insert non-documentary conditions. He concluded that it was to be used by the negotiating or confirming bank against the issuing bank and that it should not be used by the issuing bank against the other banks, although he noted that it might be effective as against the applicant.

With respect, it is extremely difficult to see any justification for the restricted reading of Article 13(c) of the UCP500 or the equivalent, Article 14(h) of the UCP600.

4  Current status

The current state of the law is, to say the least, uncertain. While the “express terms vs included by reference terms” argument commends itself to contract lawyers and to the courts, it leaves bankers in a very unpleasant situation. The banker must decide whether to accept an otherwise complying presentation of documents or to reject, perhaps wrongfully, a presentation of documents which does not include some unspecified document which purports to show compliance with the condition.

This author hopes that an Australian court would not follow the Banque de l’Indochine, Kumagai-Zenecon, Korea Bank line of cases on this point. The clear intention of the International Chamber of Commerce when changing the UCP was to banish non-documentary conditions in credits, and the wording of the above quoted articles is unambiguous. There is a clear commercial case for interpreting credits as special types of contracts so that non-documentary conditions are ignored.

As to rules of interpretation, there is a clear argument that the non-documentary condition is not inconsistent with the terms of the UCP. Instead of assuming that the condition contradicts Article 14(h) of the UCP600, it could be argued that Article 14(h) provides the method to interpret the non-documentary condition. In this argument, the parties could not have intended the non-documentary condition to call for documentation since Article 14(h) clearly provides that the negotiating bank will ignore it.

It is sometimes said that the Banque de l’Indochine approach gives effect to the commercial expectation of the parties. However, a clear statement by the courts that Article 14(h) will be honoured will clarify commercial expectations. The issuing bank will need to be more careful in drafting the credit, and the applicant will not be under any illusions as to the effect of a non-documentary clause.

Finally, the Kumagai-Zenecon approach has the effect of rendering Article 14(h) meaningless. It should not be followed.

References

Gutteridge and Megrah (1985)
H C Gutteridge and M Megrah. The Law of Bankers’ Commercial Credits. Europa, London, seventh edition, 1985.

*
Consultant; formerly Landerer Professor of Information Technology and Law, University of Sydney. The views expressed are those of the author and do not necessarily reflect the views of any other person or organisation.