Revising UCP 600: Weighing the Issues, Merits, and Challenges

Now that the revision of ISBP 821 is well underway, the perennial question is again being raised: Does the Banking Commission have a compelling business case to revise UCP 600?

It is perhaps timely to re-visit the issue and consider whether the environment for revision has changed since last the idea was formally broached in 2017 at the ICC Banking Commission meeting in Jakarta. Should the ICC contemplate a revision of UCP 600 once the ISBP exercise is completed?

Key Issues

Current status and stability: UCP 600, which entered into force 1 July 2007, has been widely adopted and has provided constancy in international trade finance. It is generally considered effective and deep-rooted, which reduces any immediate need for revision.

Digitalisation and electronic records: The introduction of electronic rules (eUCP) has been a significant development, allowing for the handling of documentary credits in a digital environment. This supplement to UCP 600 addresses the need for digitalisation without requiring a full revision of UCP 600.

Standby letters of credit and other specific needs: UCP 600 is primarily focused on commercial letters of credit and, while it can be applied to standby letters of credit to some extent, it does not fully address the specific needs of this instrument type. The International Standby Practices (ISP98) are often preferred for standbys due to more comprehensive and relevant content.

Potential for updates: There are arguments for updating UCP 600 to reflect current market practices and technological advancements. However, any revision would need to balance the benefits of change against the potential disruption of established practices and the costs associated with implementing new rules.

Missing Rules

Certain gaps in UCP 600 can be identified:

• ISBP 821 Paragraph A3, concerning the signing of certificates, certifications, declaration or statements is more equivalent to a “rule” rather than a “practice”. There is no existing article in UCP 600 addressing this issue. ISBP 821 Paragraphs P1 and L1 also stipulate the requirement for a signature on various certificates.
• ISBP 821 Paragraphs A21 (b), (d), (e) regarding language are also much closer to a rule than a practice. UCP 600 does not currently regulate the language of documents even though this is a very important matter. These paragraphs, rephrased, could become part of a revised UCP. Paragraph A21 (e) would require adjustment if it was to be formulated as a rule.
• Re-phrase ISBP 821 Paragraph A31 (original and copy documents) and subsequently incorporate it as an element of a revised UCP (Original Documents and Copies, currently UCP 600 Article 17).
• ISBP 821 Paragraph A35 (d), regarding authentication via URL, is definitely more akin to a rule and could certainly be recommended for incorporation within a revision of UCP. It would naturally fit within the signature requirement stated in UCP 600 Article 3, thereby amending/enhancing the interpretation of ‘electronic method of authentication'. Although very few documents are issued in this manner at present, this may well change in the future.
• It is arguable ISBP 821 Paragraph C13 which addresses over-shipment and goods not called for in a credit is also a rule. It could well become integrated into a revised UCP; not only with regard to an invoice, but all documents required under a credit. For example, if a bill of lading or weight list shows over-shipment or goods not called for in the credit, it would also not be acceptable.
• ISBP 821 Paragraph K9, expiry date for insurance claims, is also a candidate for converting to a rule. If so, it could amend the current UCP 600 Article 28.
• Consideration could be given to inclusion of a definition for ‘all documents’. Whilst this has been the subject of a number of ICC Opinions, we could certainly see benefit for incorporation within the UCP itself. This is already being considered for inclusion within a revised ISBP.
• UCP 600 Article 37(c) does not include a definition of a period of time for claiming and reimbursing charges.
• ‘Without delay’ is a recognised term within UCP 600, but is deliberately not defined due to the fact that, as stated in various ICC Opinions, the precise interpretation of this term would depend upon the circumstances of each case. The incorporation of a specific timeframe would require an indication of the consequence (i.e., penalty) for failure to comply in order for it to have any effect. It is clear that whilst the term ‘without delay’ does not signify an immediate action, or that an action is to be completed ‘at once’, it does imply a degree of urgency and attention that the concerned bank should apply. This is already being considered for inclusion within a revised ISBP.

Issues in Guidance Papers

• Strict Compliance: The “Notes on the Principle of Strict Compliance” Issues Paper (May 2016) concluded that there is “no merit in attempting a definition of this multifaceted subject [and that] developments in the past had proved that, as time goes by, it is customs and practice that will provide the required clarity. And once such customs and practice have become commonplace, they will form part of a future revision of ISBP.” Is it appropriate to address this matter in UCP?
• Simple Documentary Credit Format: Should this be considered as an appendix to the existing or a revised UCP 600? This is of growing importance and must be addressed in some way.
• Drafts: Is it time to suppress usage of drafts under documentary credits?
• Sanction Clauses: The use of clauses in relation to trade, economic or financial sanctions or embargos in trade finance instruments that are subject to the rules drafted by the ICC Banking Commission. Should this be part of UCP?
• Fraud: Whilst fraud is, quite rightly, out of scope for UCP 600, should some reference be made?
• Technical Advisory Briefings: If not already addressed in the rules, should Technical Advisory Briefings be considered for potential update/inclusion within UCP?

Other Questions

• Amalgamate UCP & ISBP – This is far from easy as one relates to rules and the other to practices. When rules are contravened, there is always a verifiable impact; the same cannot be stated about practices. However, should it be attempted?
• Remove Standby Credits from UCP – Based on the introduction of ISP98, this was suggested during the revision of UCP 500 in the early 2000s. However, as many standby credits were still issued under UCP, it was considered apt that they remain within the UCP; it is perhaps time to re-think this subject.  
• Add an appendix to UCP and/or ISBP that includes a guidance checklist on how individual documents should be prepared. This would aid commercial parties and likely lead to a decrease in discrepancies. This has been raised as an issue within the ISBP Education Project. In addition, adding an appendix to UCP and/or ISBP providing templates for each individual document may have merit. The question is whether or not the ICC is the appropriate organisation to address this.
• A far swifter rules revision process – With the correct focus, revision of UCP could be achieved within a 15-18 month time period. This is essential.
• Why have discrepancy rates on first presentation not decreased under UCP 600? Assessing this question is absolutely critical to understanding how to take the ICC rules forward.
• Are aspects of eUCP version 2.1 appropriate for incorporation into a revised UCP 600?
• Do the UCP transport articles still reflect customs and practice in the transport industry?
• Is the default 21 calendar day period still appropriate for presentation of documents?
• Should ‘negotiation’ be re-addressed? Should it even be included within UCP 600 just because it is ‘historically’ used in some regions? Is this sufficient justification to persist in accommodating a process that is consistently misunderstood?
• Should UCP (and other ICC rules) continue to include a Force Majeure article? There is no choice of law (or jurisdiction) article in UCP and the rules generally avoid legal issues. With this in mind, should Force Majeure be left to the contract between the buyer and the seller?
• If retained, should the Force Majeure article be aligned with the Uniform Rules for Digital Trade Transactions (URDTT) Article 16 to include ‘cyberattacks’?
• URDTT does not include an assignment article. This is predicated on the basis that the use of the term ‘transfer’ is to replace the English law word commonly used of ‘assignment’ and is an equivalent right to that of an assignment and covers the transfer of rights and benefits. Should this also apply to UCP?

Alternatives to Revision

Instead of a full revision, the ICC could just continue to issue supplementary rules and guidelines to address emerging issues without altering the core framework of UCP 600. As current examples, these include eUCP updates, ISBP revision, Technical Advisory Briefings, and Guidance Papers.

Challenges

Discrepant presentations: Historical data shows that a significant percentage of documents under documentary credits are rejected on first presentation due to discrepancies. Updates would need to focus on reducing discrepancies by providing clearer guidelines and standards for document preparation. 

Stability and widespread adoption: UCP 600 has been widely adopted and is considered stable, which reduces the immediate need for revision. The ICC has, in the decision made at the aforementioned 2017 Jakarta meeting, decided not to undertake a revision at this stage, emphasising that existing problems lie more with the application and practice of the rules rather than the rules themselves.

Complexity of revision: Any revision would need to address a multitude of comments and feedback from various stakeholders. For instance, during the last revision process, around 5,000 comments were received, making it challenging to wade through and concretely evaluate all feedback.

Practice vs. Rules: The ICC Banking Commission has opined that most problems arise from poor drafting of credits, deficient understanding of documentary credit workflows, and lack of attention to detail, rather than defects in the rules themselves. Therefore, revising the rules might not address the root causes of these issues.

Technological advancements: While there is a need to keep pace with technological developments, the ICC has opted for supplementary rules like the eUCP to address digitalisation without revising UCP 600. This approach allows for updates to be made without disrupting the core framework.

Harmonisation and standardisation: Revision would need to ensure that the rules remain harmonised and consistent across different jurisdictions and practices. This is crucial for maintaining the integrity and effectiveness of the UCP. A revised UCP 600 would aim to further harmonise practices across different jurisdictions, ensuring that all financial institutions apply the same procedures. This uniformity would reduce confusion and errors, making the process more efficient.

Costs and disruption: Implementing new rules would involve significant costs and could disrupt established practices, which might outweigh the benefits of revision. The ICC has, to date, chosen to focus on improving guidance and training rather than revising the rules.

Market and operational considerations: The documentary credit market share is decreasing and some observers argue that the rules need to be revised to reflect current trade practices. However, the ICC maintains that the rules facilitate trade and do not hinder it, suggesting that efforts should focus on streamlining practices rather than changing the rules.

Benefits of revision

Without knowing the full scope, most of these perceived benefits can only be considered as speculative. 

Increased efficiency and reduced costs: Clearer and more precise rules might reduce the time and effort required for document examination, leading to faster completion of international trade transactions. This efficiency gain may lower operational costs for banks and other financial institutions.

Reduced discrepancies: Improved guidance and clearer rules might decrease the high discrepancy rates for initial presentation under documentary credits, which currently lead to delays and additional costs. Discrepancies result in a high rejection rate of documents under documentary credits. Clearer rules might minimise this issue, speeding up the process and reducing the need for re-presentations.

Enhanced operational efficiency: Updated rules could further harmonise credit practices, reducing any complexity and variability that can lead to errors and additional costs. This harmonisation would facilitate smoother transactions and reduce the need for costly legal interventions.

Digitalisation advantages: Incorporating electronic presentation rules more seamlessly into the main UCP could accelerate the digitisation of trade finance. This would not only reduce the physical handling costs but also speed up the processing time, leading to faster payment cycles and reduced costs associated with manual processing.

Conclusion

In summary, while there are valid arguments for updating UCP 600, the current consensus is that the challenges associated with revising the rules, including the need for stability, addressing practice issues rather than rule defects, and the costs of implementation, outweigh the immediate benefits of revision.

Instead, it makes sense to continue focusing on supplementary rules and improving practices to keep pace with technological advancements and market needs.