Letter of Credit Forum

B) Form and Notification of Credits—Form and Notification of Credits (Articles 6 to 12 UCP 500)

ARTICLE 6 Revocable v. Irrevocable Credits

A. A Credit may be either

i. revocable,

or

ii. irrevocable.

B. The Credit, therefore, should clearly indicate whether it is revocable or irrevocable.

C. In the absence of such indication the Credit shall be deemed to be irrevocable.

Article 6 a UCP 500 –Identical legal value of revocable and irrevocable Credits:

The UCP still distinguish between revocable and irrevocable Credits; however; despite the revocability both types of Credits are identical, not only in the contractual relation between issuing bank and applicant, but also between bank and beneficiary. From a business point of view, the two types are not identical since the Credit can be cancelled at any time (compare Article 8 a UCP 500). In practice banks issue revocable Credits in countries with currency export restrictions (Devisenbewirtschaftung), where an Applicant in order to receive an im- or export license from his cash starved government has to show one way of how he intends to pay for the goods.

Article 6 b, Article 6 c UCP 500 – Express statement of revocability required: As a discretionary rule, Article 6 b,c stipulate that the Applicant instructs the bank to issue a revocable or irrevocable Credit. Absent such an instruction, Article 6 c UCP 500 provides –contrary to previous revisions -- that such a Credit shall be deemed irrevocable.

Hence follows: It is not necessary to expressly designate a Credit as “irrevocable”; only if the Applicant intends the Credit to be irrevocable it needs to state so expressly.

ARTICLE 7 Advising Bank's Liability

A. A Credit may be advised to a Beneficiary through another bank (the "Advising Bank") without engagement on the part of the Advising Bank, but that bank, if it elects to advise the Credit, shall take reasonable care to check the apparent authenticity of the Credit which it advises. If the bank elects not to advise the Credit, it must so inform the Issuing Bank without delay.

B. If the Advising Bank cannot establish such apparent authenticity it must inform, without delay, the bank from which the instructions appear to have been received that it has been unable to establish the authenticity of the Credit and if it elects nonetheless to advise the Credit it must inform the Beneficiary that it has not been able to establish the authenticity of the Credit.

Introduction: Another bank can be employed in the following functions:

- Advising Bank, which notifies the beneficiary of the Credit

- Nominated Bank (Article 10 b UCP 500), which is authorized to pay, incur a deferred payment undertaking, to accept drafts or to negotiate.

- Confirming Bank (Article 9 b UCP 500), which is jointly and severally liable with the issuing bank for the satisfaction of the payment obligations under the Credit.

Theoretically, these functions can be combined in any way possible. In practice however, the permutations are limited. In particular, a Credit should always be made payable with the Confirming Bank (compare Article 9 b UCP 500).

Article 7 a UCP 500 Mandate to Advise: An Advising Bank, acting on bequest of the Issuing Bank notifies the beneficiary of the existence and the terms of the Credit, without incurring any liability under the Credit. [insert] Since the Advising Bank transmits the text of the Credit to the beneficiary, some authors refer to it as a “mailman”. Even though this classification is not a 100 % accurate (the Advising Bank is still obliged to check the apparent authenticity of the Credit which it advises), the majority view in jurisprudence considers the Advising Bank not a subcontractor but a [insert] . Consequently the Issuing Bank is liable for delays and errors of the Advising Bank. (footnote4)

Article 7 a, sentence 1 UCP 500: Notification only after authenticity check: Before the Advising Bank notifies the beneficiary, “it shall take reasonable care” to check the apparent authenticity of the Credit which it advises. The term “apparent authenticity” –already used in Article 22 c UCP 400- requires the Advising Bank to examine its mandate to advise the Beneficiary. Among the appropriate criteria for examination are the following: impression of whole document, orderliness of signatures, correct usage of agreed upon keys, encryption, or other encoding arrangements. (footnote5)

Article 7, sentence 2 UCP 500 – Rejection of mandate to advise: This rule, introduced in the 1993 revision, obligates the bank, to reject without undue delay a request from the issuing bank to advise a Credit. However, only if the parties entertain a business relation, the advising bank is legally obligated to reject such a request. If this is not the case, i.e. the Issuing Bank selects another bank with whom it has never done any business, then the absence of a rejection cannot lead to the conclusion that the advising bank has silently accepted the mandate (footnote6). Supra the authors mentioned the Issuing Bank’s liability for another bank; due to this liability the issuing bank needs to check whether or when the advising bank has accepted the mandate; a failure to receive an acceptance has to prompt the issuing bank to confirm the status.

Article 7 b UCP – Notification of beneficiary when authenticity of Credit cannot be ascertained: If the advising bank decides to advise the beneficiary of the Credit without being able to ascertain the Credit’s authenticity, it has to inform the beneficiary thereof.

Additionally, the advising bank is obligated to inform the issuing bank that it could not establish the Credit’s authenticity and what other steps it has undertaken. This obligation is independent of the acceptance of the mandate to advise the Credit.

Incomplete or Unclear Instructions as to the mandate to advise. An Advising Bank is also subject to the obligation to examine the instructions received for completeness and ambiguity. However, the examination should only surface obvious defects, perceivable without a detailed scrutiny (footnote7).

ARTICLE 8 Revocation of a Credit

A. A revocable Credit may be amended or canceled by the Issuing Bank at any moment and without prior notice to the Beneficiary.

B. However, the Issuing Bank must:

i. reimburse another bank with which a revocable Credit has been made available for sight payment, acceptance or negotiation for any payment, acceptance or negotiation made by such bank prior to receipt by it of notice of amendment or cancellation, against documents which appear on their face to be in compliance with the terms and conditions of the Credit;

ii. reimburse another bank with which a revocable Credit has been made available for deferred payment, if such a bank has, prior to receipt by it of notice of amendment or cancellation, taken up documents which appear on their face to be in compliance with the terms and conditions of the Credit.

Article 8 a UCP 500 – exercise of the revocation: The Issuing Bank can at any time and without prior notice to the Beneficiary, amend or cancel a revocable Credit. The proviso has the effect of a condition subsequent: Unless the Issuing Bank exercises the revocation, it is subject to the same obligations as if the Credit were irrevocable; i.e. the Credit constitutes an [abstraktes Schuldversprechen iSv 780 BGB].

Article 8 b (i) UCP 500 Revocation possible until satisfaction: The Issuing Bank may cancel a revocable Credit, which stipulates either payment, acceptance or negotiation, unless the secondary bank has already performed the respective obligation under the Credit; i.e. even if the secondary bank has received the documents and confirmed their compliance with the stipulations of the Credit the Credit can still be revoked. The ICC Banking Commission explicitly refused to limit right of revocation (footnote9).

Article 8 b (ii) UCP 500 – Special provision for the exercise of the right of revocation with deferred payment Credits: Deferred payment Credits cannot be revoked after the secondary bank has received the documents. The differing treatment of sight and deferred payment Credits in regards to their revocation is not entirely convincing. In both cases the receipt of the documents triggers the payment obligation of the issuing bank without obligating the secondary bank. Since the secondary bank acts as a subcontractor and agent for the issuing bank, it would seem consequent, to treat sight and deferred payment Credits identically. However, the majority opinion in jurisdiction and jurisprudence advocates the contrary.

Article 9: Liability of Issuing and Confirming Banks

ARTICLE 9 Liability of Issuing and Confirming Banks

A. An irrevocable Credit constitutes a definite undertaking of the Issuing Bank, provided that the stipulated documents are presented to the Nominated Bank or to the Issuing Bank and that the terms and conditions of the Credit are complied with:

i. if the Credit provides for sight payment to pay at sight;

ii. if the Credit provides for deferred payment to pay on the maturity date(s) determinable in accordance with the stipulations of the Credit; iii. if the Credit provides for acceptance;

a. by the Issuing Bank to accept Draft(s) drawn by the Beneficiary on the Issuing Bank and pay them at maturity,

or

b. by another drawee bank to accept and pay at maturity Draft(s) drawn by the Beneficiary on the Issuing Bank in the event the drawee bank stipulated in the Credit does not accept Draft(s) drawn on it, or to pay Drafts(s) accepted but not paid by such drawee bank at maturity;

iv. if the Credit provides for negotiation to pay without recourse to drawers and/or bona fide holders, Draft(s) drawn by the Beneficiary and/or document(s) presented under the Credit. A Credit should not be issued available by Draft(s) on the Applicant. If the Credit nevertheless calls for Draft(s) on the Applicant, banks will consider such Draft(s) as an additional document(s).

B. A confirmation of an irrevocable Credit by another bank (the "Confirming Bank") upon the authorization or request of the Issuing Bank, constitutes a definite undertaking of the Confirming Bank, in addition to that of the issuing Bank, provided that the stipulated documents are presented to the Confirming Bank or to any other Nominated Bank and that the terms and conditions of the Credit are complied with:

i. If the Credit provides for sight payment to pay at sight;

ii. if the Credit provides for deferred payment to pay on the maturity date(s) determinable in accordance with the stipulations of the Credit;

iii. if the Credit provides for acceptance:

a. by the Confirming Bank to accept Draft(s) drawn by the Beneficiary on the Confirming Bank and pay them at maturity,

or

b. by another drawee bank to accept and pay at maturity Draft(s) drawn by the Beneficiary on the Confirming Bank, in the event the drawee bank stipulated in the Credit does not accept Draft(s) drawn on it, or to pay Draft(s) accepted but not paid by such drawee bank at maturity;

iv. if the Credit provides for negotiation to negotiate without recourse to drawers and/or bona fide holders, Draft(s) drawn by the Beneficiary and/or document(s) presented under the Credit. A Credit should not be issued available by Draft(s) on the Applicant. If the Credit nevertheless calls for Draft(s) on the Applicant, banks will consider such Draft(s) as an additional document(s).

C. i. If another bank is authorized or requested by the Issuing Bank to add its confirmation to a Credit but is not prepared to do so, it must so inform the Issuing Bank without delay.

ii. Unless the Issuing Bank specifies otherwise in its authorization or request to add confirmation, the Advising Bank may advise the Credit to the Beneficiary without adding its confirmation.

D. i. Except as otherwise provided by Article 48, an irrevocable Credit can neither be amended nor canceled without the agreement of the Issuing Bank, the Confirming Bank, if any, and the Beneficiary.

ii. The Issuing Bank shall be irrevocably bound by an amendment(s) issued by it from the time of the issuance of such amendment(s). A Confirming Bank may extend its confirmation to an amendment and shall be irrevocably bound as of the time of its advice of the amendment. A Confirming Bank may, however, choose to advise an amendment to the Beneficiary without extending its confirmation and if so, must inform the Issuing Bank and the Beneficiary without delay.

iii. The terms of the original Credit (or a Credit incorporating previously accepted amendment(s)) will remain in force for the Beneficiary until the Beneficiary communicates his acceptance of the amendment to the bank that advised such amendment. The Beneficiary should give notification of acceptance or rejection of amendment(s). If the Beneficiary fails to give such notification, the tender of documents to the Nominated Bank or Issuing Bank, that conform to the Credit and to not yet accepted amendment(s), will be deemed to be notification of acceptance by the Beneficiary of such amendment(s) and as of that moment the Credit will be amended.

iv. Partial acceptance of amendments contained in one and the same advice of amendment is not allowed and consequently will not be given any effect.

Introduction: Liability and usability:

It is necessary to stipulate the obligations of issuing and confirming bank, since the essence of their obligations under a Credit may be

-payment

-deferred payment

-acceptance or negotiation.

Furthermore, it is relevant, whether the Credit can be used at the

-issuing bank itself,

-confirming bank, or

- another bank.

Issuing or confirming bank, if they are not a Nominated Bank, are liable like a guarantor for satisfaction of the Credit at the bank where the Credit is payable; in a freely negotiable Credit any bank is a Nominated Bank (see Article 10 b UCP 500) whose performance the issuing or confirming bank guarantees. Only if in cases of force majeure (war, nationalization etc.) a Nominated Bank cannot satisfy its obligations under a Credit, the Beneficiary can demand payment from Issuing or Confirming Bank at their domicile.

Nominated Bank’s obligation to pay

The UCP 400 worded the provision that a Credit is payable either by the Issuing Bank, the Confirming Bank, or a Nominated Bank as follows (see Article 10 UCP 400):

“i. if the credit provides of sight payment – to pay or that payment will be made;

ii. if the credit provides of deferred payment – to pay, or that payment will be made on the date(s) determinable in accordance with stipulations of the Credit.

iii. if the credit provides for acceptance – to accept drafts drawn by the beneficiary if the credit stipulates that they are to be drawn on the issuing bank, or to be responsible for their acceptance and payment at maturity if the credit stipulates that they are to be drawn on the applicant for the credit or any other drawee stipulated in the credit.

iv. if the credit provides for negotiation – to pay without recourse to drawers and /or bona fide holders, draft(s) drawn by the beneficiary, at sight or at a tenor, on the applicant for the credit or on any other drawee stipulated in the credit, other than the issuing bank itself, or to provide for negotiation by another bank and to pay, as above, if such negotiation is not effected.

Revision of the wording regarding the obligation of the Nominated Bank to strengthen the “primary liability”

When redefining the obligation Issuing or Confirming Bank, the 1993 revision abolished the passages underlined above (see Article 9 a (i) to (iv), Article 9 b (i) to (iv) UCP 500). The ICC supported the new wording as follows: “The NCs stated that these words appearing in UCP 400 Article 10 defined a less certain and less reliable promise than the Issuing Bank or Confirming Bank’s irrevocable promise than the Issuing Bank or Confirming Bank’s irrevocable promise and primary liability “to pay”. The promise that payment will be made, as contained in UCP 400 Article 10, did not specify by whom, when, or after what particular act or event the payment was to be made.”(footnote11)

Primary and secondary liability of Issuing and/or Confirming Bank:

The author believes that the revision of Article 9 a and b UCP 500 is based on a misconception regarding the term “primary liability”. American jurisprudence uses the term primary liability to designate a liability independent of the underlying commercial transaction (e.g. guarantee or standby), secondary liability on the other hand specifies a liability, which is dependent on the underlying transaction, i.e. subject to the same defenses (e.g. Buergschaft).Accordingly the new rules for Standbys (ISP98) state in section 1.10 (iii): “primary (if it does), it signifies merely that it is the independent obligation of the issuer” (footnote12) The ICC erroneously assumes, that the mention of a Nominated Bank, limits the liability of the Issuing Bank. The contrary is true. The essence of a primary obligation can be, to guarantee the obligation of a third party.(footnote13) Consequently:When using another bank as Nominated Bank, the obligation of Issuing or Confirming Bank consists of executing the promised obligation via the Nominated Bank. (Schickschuld). The Issuing or Confirming Bank remain liable until the Nominated Bank has paid the beneficiary or credited his account with the economic value of the Credit.

Validity/Availability:

The revision of Article 9 a and b UCP 500 has not changed the distinction between validity and availability (compare explanations Article 2 UCP 500). A Credit is valid, where the documents have to be presented in compliance with the expiry date (Article 42 UCP 500). Available is a Credit with the bank, which is authorized according to Article 10 b (i) UCP 500, to honor the documents through payment, or incur the obligation to pay deferredly, accept or negotiate drafts.

Designation of a Nominated Bank as a core provision of a Credit/No Bypassing:

The designation of a Nominated Bank binds all parties involved, unless the designation has been rescinded (compare Article 10 UCP 500); i.e. regarding payment the Issuing or Confirming Bank can refer the Beneficiary to the Nominated Bank. The beneficiary does not have a claim against Issuing or Confirming Bank, to pay him at their respective domiciles. As far as Article 9 a UCP 500 stipulates in regards to the presentation of documents to the Issuing Bank “provided that the stipulated documents are presented to the Nominated Bank or to the Issuing Bank”(compare for the Confirming Bank Article 9 b UCP 500: “provided that the stipulated documents are presented to the Confirming or to any other Nominated Bank”), the Beneficiary cannot choose, where he wants to demand payment. Even if the Beneficiary has sound reasons to demand payment of Issuing or Confirming Bank, e.g. due to foreign exchange restrictions or preliminary injunctions issued against the Nominated Bank, he will rightly see himself directed to demand payment from the Nominated Bank.

Beneficiary’s Option only regarding presentation of documents:

Even if the parties designated a Nominated Bank, the beneficiary can always present the documents to the Issuing or Confirming Bank which are primarily liable. This right is uncontested. Wheble pointed out regarding the revision of Article 16 d UCP 400, that it acknowledged the right of the beneficiary himself to make presentation to the issuing bank (footnote14 )[original text needed]. This legal and factual position has not changed, for, Article 16 d UCP 400 has been inserted into Article 14 d UCP 500. The option to present documents under the Credit to Issuing or Confirming Bank does not modify the designation of the Nominated Bank. The option to bypass the Nominated Bank when presenting documents hence is rather irrelevant for commercial practice and only advisable, if the Nominated Bank cannot operate due to strike, riots or civil unrest.

Liability of Issuing Bank (Article 9 a (i) to (iv) UCP 500)

Article 9 a UCP 500 – Introduction: Credit as obligation subject to condition precedent:

Article 9 a UCP 500 defines the obligation of the Issuing Bank in regards to the different modes of payment (sight payment, deferred payment, acceptance or negotiation of drafts). The obligation of the Issuing Bank is subject to the condition that “the stipulated documents are presented to the Nominated Bank or to the Issuing Bank and that the terms and conditions of the Credit are complied with”. As mentioned above [margin number], the beneficiary may present the documents not only to the Nominated Bank but also to the Issuing Bank in order to meet the expiry date of the Credit (validity of the Credit); however, he may only request payment from the Nominated Bank and is not permitted to choose among Issuing, Confirming and Nominated Bank.

Article 9 a (i) UCP 500 – Payment Credits:

If the Credit calls for sight payment, the Nominated Bank has to pay at sight. Consequently, the custom pervasive with Anglo-American banks to demand the presentation of sight drafts, does not make any sense. These sight drafts have no additional legal significance and are only filed even without notification of the Applicant.If the Credit calls for payment in a currency different from the legal tender at the domicile of the Nominated Bank, Nominated Banks usually require two days to procure the currency. Procurement has to be effectuated in an account in the country of the respective currency. (footnote 150[Spezialität deutschen Rechts ??] )

Article 9 a (ii) UCP 500 – Deferred Payment Credits:

In deferred payment Credits the text of the Credit itself has to indicate the “maturity date” when payment is due. Example correct: three months after issuance of bill of lading;Wrong: three months after arrival of vessel.This is a moment in time which the Issuing Bank cannot verify. According to the prevailing opinion in jurisprudence the maturity date is an indispensable condition from which the bank cannot deviate by prematurely paying the beneficiary.

In the past, in particular Confirming Banks, believed that they were entitled to satisfy their obligations before the maturity date (footnote16). However, Canaris correctly advocates, that the deferred date of payment needs to be observed since Nominated Banks are also bound by the instructions of the Applicant.

If a Nominated Bank prematurely pays the beneficiary, it effectively cuts off the right of the Applicant to have payment refused on the basis of fraud, a fraud that was discovered between presentation of the documents and stipulated maturity date (footnote 17).

Article 9 a (iii) UCP 500 – Acceptance Credits: Means of availment and determination of drawee bank:

Acceptance Credits can only be paid through deferred payment drafts [Nachsichttratte], since sight drafts are to be paid at sight and cannot be accepted. Only the Bank, which according to the stipulations of the Credit is the drawee, can issue an Acceptance. Hence, the use of a secondary bank is only advisable, if the secondary bank is also a nominated Bank, i.e. the drafts can be drawn on it (see explanations at Article 9 b regarding the problems arising when acceptance credits are confirmed, even though the Confirming Bank is not a Nominated Bank).

Article 9 a (iii) UCP 500 – Deferred Payment Drafts (Nachsichttratte)

If the Credit provides for acceptance by the Issuing Bank, the Issuing Bank is obligated to accept drafts and pay them at maturity. If the beneficiary asks to receive the acceptance in order to discount the draft with another Bank, the Issuing Bank has to comply with this request.

Article 9 a (iii) b UCP 500 – Drafts providing for acceptance by another bank

If the Credit stipulates acceptance of a draft not by the Issuing Bank but another bank, the Issuing Bank is liable not only for the issuance of the acceptance but also payment at maturity by the other bank. The Issuing Bank is a guarantor in regards to the satisfaction of the obligations of the other bank; i.e. a direct claim against Issuing Bank arises when the other bank

Either does not accept the drafts presented by the beneficiary; or

Does not pay the draft at maturity.

The emphasis of a primary liability, which the author already criticized in the introduction as inviting misconceptions, is again shown in the definition of Article 9 a (iii) b as revised in 1993. The definition sets out to deal with the negative case, i.e. that another bank does not accept or pay its draft. This is the only explanation for the confusing wording of Article 9 b (iii) b. UCP 500, according to which the Issuing Bank is obligated:

To accept and pay at maturity Draft(s) drawn by the Beneficiary on the Issuing Bank in the event the drawee bank stipulated in the Credit does not accept Draft(s) drawn on it,

Or to pay Draft(s) accepted but not paid by such drawee bank at maturity.

However, the obligation of the Issuing Bank consists primarily in striving to achieve the positive case, i.e. have the drawee bank accept and pay the Drafts. The Issuing Bank only becomes a guarantor once the other Bank failed to accept or pay the drafts it previously accepted.

Requirement of Issuing Bank to accept drafts if other bank fails to accept:

The obligation of the Issuing Bank to accept drafts of the beneficiary in case the other bank fails to provide its acceptance, is not only cumbersome but also risky. The acceptance of the Issuance Bank transfers the place of payment from the domicile of the other bank to the domicile of the Issuing Bank. In other words: restrictions regarding the transferability or export of funds, which were not in place at the domicile of the other Bank, now bind the Beneficiary. This is the consequence from the fact that an acceptance can only be claimed at the domicile of the drawee bank. The domicile of the drawee is the place of satisfaction of the obligation created by the acceptance (compare Article 28 WG and Article 2, 3 WG according to which absent specific indication the place shown at the drawee’s signature is deemed to be the place of payment).

Applicant cannot be drawee

Contrary to previous revisions Article 9 a (iii) UCP 500 only provides for the acceptance of Banks, but no longer of Applicants. The ICC justifies the revision as follows:

“The reference in UCP 400 sub-Article 10 a (iii) to drafts drawn on the Applicant or any other drawee is deleted because of the reasons given concerning “authorities to pay”, “authorities to purchase” and “authorities to accept” in UCP 500 sub-Article 9 a above.”(footnote 18)

Even though irrevocable negotiation credits [Negoziierungskredite] are considered Credits, their value and format was not without doubt.

Liability even if Credit stipulates acceptance of Applicant

The liability of the Issuing Banks should not change if it issues a Credit that in violation of Article 9 a (iii) UCP 500 stipulates, that the Applicant is to accept the drafts. Also in this case the Issuing Bank’s liability is to guarantee the drawee’s acceptance and payment.

Liability of the drawee bank also if the acceptance of documents is effectuated outside the draft:

The liability of the drawee bank does not depend on the fact that, after examining the documents and considering them compliant, it effectuated its acceptance on the draft itself. A confirmation of the acceptance by means of telecommunication is sufficient. The ICC Banking Commission found as follows:

“Any dispute as to the requirement and manner of “physical” acceptance is between the importer and the issuing bank based upon local banking practices and law.”(footnote11).

The experts of the ICC decided a case where the drawee bank was at the same time Issuing/Confirming Bank. The author advocates that this decision also applies to unconfirmed Credits and the liability of a Nominated Bank, since a Nominated Bank cannot claim that it is not liable after accepting the draft.

Article 9 a (iv) UCP 500 – Negotiation of drafts and other documents:

The 1993 revision for the first time defined and expanded the definition of “negotiation” in Article 10 b (ii) UCP 500 as follows:

“… the giving of value for Draft(s) and/or document(s) by the bank authorized to negotiate”.

Even though the ICC in its attempt to define “negotiation” only intended to clarify that “negotiation” consists of more than mere acceptance of the documents, i.e. the giving of value to the beneficiary, the revision led to multiple misunderstandings, which prompted the ICC to publish an explanation in their position paper no. 2 (compare explanation to Article 10 b (ii) UCP 500). However, even the position paper has not changed the fact, that “negotiation” has become “the most misused word in documentary credits”. (footnote22).

Assuming that in distinction to a sight payment credit, negotiation consists of the purchase of drafts and/or documents under deduction of interim interest, then now as before negotiation is possible in the following cases:

When sight drafts are to be drawn not on the Issuing or Confirming Bank; or

The Credit is available with after-sight drafts, in this instance it is assumed, even though the UCP 500 no longer explicitly provide for it, that the Issuing or Confirming Bank can purchase after-sight drafts for which they are the drawee. (footnote23)

Article 9 a (iv) sentence 1 UCP 500 –Limitation of issuing bank’s obligation to pay is Indeterminate

The 1993 revision rephrased the obligation of the issuing bank to “pay without recourse to the drawers and/or bona fide holders, Draft(s) drawn by the Beneficiary and/or document(s) presented under the Credit.” This definition misconstrues the primary obligation of the Issuing Bank when the parties designated a Nominated Bank. In this case the Issuing Bank is obligated to have the Nominated Bank negotiate the drafts. A payment obligation of the Issuing Bank only becomes relevant, when· The Credit is payable at the Issuing Bank either through presentation of documents and/or drawing of sight drafts.· If the Issuing Bank designates a Nominated Bank (and in a freely negotiable Credit any bank can be a Nominated Bank compare Article 10 b (i) UCP 500) and the Nominated Bank refuses negotiation even though the Beneficiary has presented documents which comply with the terms of the Credit.

Wheble, previously chairman of the ICC Banking Commission, on the occasion of the 1993 revision accurately described the obligation of the Issuing Bank when the Credit is negotiable with another bank:

“If the nominated Bank refuses to negotiate, or the issuing bank has nominated itself as the negotiation bank, the issuing bank will have to pay. If it effects settlement before the maturity date of a draft at a tenor it would be entitled to pay less a discount for early settlement.”(footnote24)

Article 9 a (iv) b, sentence 1 UCP 500 – Applicant can no longer be drawee

Since the 1993 revision, “a credit should not be issued available by Draft(s) on the Applicant”. As the following sentence of Article 9 a (iv) b explains, banks will consider such Draft(s) as an additional document(s) and will examine them according to commonly applicable principles. Meaning or reasons for this stipulation are not discernible. Contrary to acceptance Credits there is no reason to prohibit that the Applicant be drawee. When negotiating a draft it is irrelevant who the drawee is.

The purchase of drafts does not depend on whether the drawee issues his/her acceptance.

Obligation of the Issuing Bank when Applicant is drawee:

In this case the issuing Bank is still obligated to

- take the responsibility for the negotiation of the secondary bank,

- pay, if the Nominated Bank fails to negotiate itself.

For purposes of clarification: The issuance of a negotiation Credit is only rational when designating a Nominated Bank or when issuing a freely negotiable credit. If the Credit is payable only with the Issuing Bank, then only satisfaction of the obligation under the Credit through payment makes sense.

Article 9 b (i) to (iv) UCP 500 – Obligation of the Confirming BankIntroduction: Joint and several liability:

According to Article 9 UCP 500 a confirmation “constitutes a definite undertaking of the Confirming Bank, in addition to that of the Issuing Bank”. Joint and several liability means that two obligors are liable for the same obligation. From this principle the ICC concludes that the obligations of Issuing and Confirming Bank are identical: ”Sub-Article 9 (b) (i.) (ii.)(iii.) and (iv.) also reflect that the primary liability of the Confirming Bank is equal to that of the Issuing Bank. For this reason, the wording of this sub-Article mirrors that of sub-Article 9 (a) (i.) (ii.)(iii.) and (iv.) (footnote 26).

Order of claims against Issuing/Confirming Bank and or Nominated Bank:

The UCP 500 mirror the wording regarding the obligation of Issuing and Confirming Bank (see Article 9 a (i) to (iv) UCP 500 and Article 9 b (i) to (iv) UCP 500),

However, this does not change the completely different function of the banks. This is the consequence of the fact that Credits according to Article 10 b (i) UCP 500 can only be payable at one bank.

Only if the parties forgot to choose whether the Credit should be payable with the Issuing Bank, the Confirming Bank or a Nominated Bank, the beneficiary has the choice from which bank to request payment. Absent this case, which in practice is a rare exception, the Beneficiary can only collect from the Bank where the Credit is payable, regardless of whether this is the Issuing or the Confirming Bank. A Bank that is not Nominated Bank only guarantees the obligation of the Nominated Bank; only after the Nominated Bank has failed to satisfy its obligation the Beneficiary can start collecting from the Issuing or Confirming Bank which are not Nominated Banks. (footnote27).

Article 9b UCP 500 – Timely Presentation of documents and designation of Nominated Banks

Basic requirement for triggering the joint and several liability of the Confirming Bank is the timely presentation of documents. Article 9 b UCP ambiguously phrases this requirement as follows:

“Provided that the stipulated documents are presented to the Confirming Bank or to any other Nominated Bank.”

This wording is misleading since the Beneficiary cannot only present the documents with the Confirming Bank and Nominated Bank but also with the Issuing Bank. This option exists particularly when a confirmed Credit is not payable with the Confirming Bank but with the Issuing Bank. The lack of precision of the wording is the consequence of the 1993 revision which no longer considers the issuing Bank as Nominated Bank, even if the Credit is payable with the Issuing Bank. (footnote28)

Nominated Banks and confirmed payment and acceptance Credits:

A Beneficiary’s choice to present the documents with the Issuing Bank does not change the designation of a bank as Nominated Bank. If the Confirming Bank is the Nominated Bank, the Beneficiary who has presented the documents directly to the Issuing Bank, has to collect from the Nominated Bank:

“The designation of a bank as Nominated Bank is not altered. If the Confirming Bank is Nominated Bank, the Issuing Bank, even if the Beneficiary has directly presented the documents to it, will provide the Nominated Bank with the funds payable under the Credit; a fact that needs to be taken into consideration in regards to advances (of which the Issuing Bank does not necessarily know) and assignments related to such advances.”(footnote29)

Appropriate wording of the confirmation commitment: According to the wording of Article 9 a (iv) UCP 500, only negotiation credits, unless they are freely negotiable, need to be payable with the Confirming Bank, since the Confirming Bank can only purchase documents if these documents have been offered to her (compare regarding the exceptions explanations to Article 9 b (iv) UCP 500). Other types of Credits can be payable with the Issuing Bank or the Nominated Bank. From the point of view of the Confirming Bank, sight and deferred payment Credits and acceptance Credits should be payable with the Confirming Bank and not with another bank. Otherwise, the Confirming Bank runs the risk that it is bypassed regarding presentation of documents and processing of the Credit; in these cases the Confirming Bank does not even know, if or when the obligation under the Credit is satisfied if the Issuing Bank or Nominated Bank accepts the documents and pays the beneficiary. An undesired state of suspense can ensue, when documents are accepted “with reservation”, the compliance of documents with the Credit is a point of contention between Nominated Bank and Issuing Bank, or in an acceptance Credit the expiry of an acceptance has to be awaited. The legal proceedings of Northern Trust Company and Community Bank –explained above [margin number], shows, that if the Beneficiary timely presents documents with the Issuing Bank, a waiting period or negotiations may follow, until finally the refusal to honor the documents is certain. In such a case the Confirming Bank might be called upon even after a couple of months.

Disputed Liability of the Confirming Bank when the Beneficiary presents documents directly to the Issuing Bank under a Payment or Acceptance Credit.

The efforts of the ICC to strengthen the “primary liability” of Issuing or Confirming Bank, have led to the erroneous opinion, that the Confirming Bank ceases to be liable if the Beneficiary directly presents the documents to the Issuing Bank and fails to also present the documents to the Confirming Bank before the expiration of the Credit. The ICC substantiates this opinion as follows:

“This provision now contains the stipulation that in a confirmed Credit the documents, as required by the Credit, must be presented to the Confirming Bank or to any other Nominated Bank. This change supports the view that a Confirming Bank's liability is separate from that of the Issuing Bank. A direct presentation of the documents to the Issuing Bank or the bypassing of the Confirming Bank, unless otherwise authorized in the Credit, does not amount to presentation of documents and compliance with the terms of the Confirming Bank's undertaking. Under this new Article, and unless otherwise authorised in the Credit, if a Confirming Bank is bypassed in the presentation of documents and its confirmation to the Credit expires before it receives such complying documents, the Confirming Bank is no longer liable to honour such presentation.”(footnote30)
Liability despite BypassingThe view of the ICC regarding the exemption from liability in case of “bypassing” is erroneous and is a consequence of the confusion of availability and payability of the Credit. It is uncontested that a Beneficiary can present the documents to the Issuing Bank. This is the reason, as already mentioned [margin number ?], for the ICC to revise Article 16 d UCP 400 (now Article 14 d (i) UCP 500) in order to strengthen the Beneficiary’s right to directly present the documents to the Issuing Bank (footnote 31). The option for a Beneficiary to directly submit documents to the Issuing Bank has been uncontested in legal literature. Zahn e.g. addresses the issue as follows:“From a legal point of view, no reasons are discernible, why documents cannot be presented directly to the Issuing Bank. Unless a Nominated Bank has been designated, the Beneficiary is not obliged to utilize the service of a secondary bank which acts as a mailman or in case of a confirmed Credit to demand payment from the Confirming Bank instead of the Issuing Bank.”

View of the courts regarding liability of the Confirming Bank in cases of Bypassing:

That directly presenting the documents to the Issuing Bank complies with the expiry date of the Credit was illustrated in the already mentioned case Northern Trust v. Community Bank (footnote33). In this case West Coast Bank, which later declared bankruptcy, issued an LC to the benefit of Northern Trust Company: “Available by your drafts at sight on West Coast Bank, Encino, California.” Community Bank confirmed the Credit without modification.

Due to the bankruptcy of West Coast Bank, the timely presented documents were not processed. Community Bank, when asked to pay, defended itself with the argument of bypassing. However, the court decided against Community Bank with the following arguments:

“The court held that the letter of credit called for payment by the confirming bank if Northern Trust made a timely presentment upon the issuer. Accordingly, the confirming bank had to comply with its obligation to pay when the beneficiary made its timely presentment to the issuer.”

Regarding the decision regarding the execution of requests to confirm the author recommends the following: a bank should not confirm payment-, deferred payment and acceptance Credits, if the Confirming Bank is not Nominated Bank. Thus a bank can avoid bypassing, since the presentment of documents to the issuing bank will occur only in extreme cases (as e.g. war, riots, breakdown of communication infrastructure in the country of the confirming bank).

Forms of Confirmation Article 9 b (i), (ii) UCP 500 – Confirmed sight, deferred payment credits:

Payment credits should only be confirmed if the Confirming Bank is also the Nominated Bank (compare introduction). If Issuing or Confirming Bank prepay the Beneficiary under a (confirmed) deferred payment credit they are not covered by the UCP.

A confirming bank which deems the documents presented by the beneficiary as compliant and pays the beneficiary prior to the due date violates the principle that it has strictly to comply with the instructions of the Applicant. Also it runs the risk that before the due date, the Applicant proves that the beneficiary committed fraud when demanding payment under the Credit. Prepayment of the Credit by the Confirming Bank hence will be deemed the granting of a loan outside the realm of the UCP at the confirming bank’s risk.

Article 9 b (iii) UCP 500 – Confirmation of Acceptance Credits:

A bank should only confirm acceptance credits when it will be drawee for the drafts presented by the beneficiary. In this case the Confirming Bank has to “accept Draft(s) drawn by the Beneficiary on the Confirming Bank and pay them at maturity” (see Article 9 b (iii) a. UCP 500). The alternative as detailed in Article 9 b (iii) b. UCP 500 provides for acceptance by another bank and is not recommended since the Confirming Bank can be bypassed. If a Bank decides nevertheless to confirm a credit which provides for acceptance of drafts by another bank, a beneficiary, whose drafts the Nominated Bank did not accept or pay at maturity, has to issue new drafts drawn on the Confirming Bank (see Article 9 b (iii) b UCP 500). During this cumbersome process it is the Confirming Bank’s duty to check, whether the nominated bank in fact did not accept or pay drafts or whether the reason for non payment was the presentation of non-complying documents.

Article 9 b (iv) UCP 500 – Confirmation of Negotiation Credits:

Negotiation credits can designate a specific nominated bank or can be freely negotiable (see Article 10 b (i) sentence 2 UCP 500). According to the language of Article 9 b (iv) UCP 500, the confirming bank is only obligated to negotiate without recourse to drawers and/or bona fide holders, Draft(s) drawn by the Beneficiary and/or document(s) presented under the Credit. Hence, an obligation to negotiate only exists for a confirming bank, if the beneficiary timely presents the documents to the confirming bank. However, it has to be kept in mind, that the confirming bank is liable for the satisfaction of the negotiation credit if the confirming bank confirms a credit where it is not the nominated bank or where the credit is freely negotiable. In these cases it seems doubtful that the confirming bank could avail itself of the wording of Article 9 b (iv) UCP 500.

Consequently the author recommends the following:

- a negotiation credit, payable with another bank, should not be confirmed.

- A freely negotiable credit should be confirmed with the limitation that the confirmation is only valid if the beneficiary timely presents the documents to the confirming bank.

Article 9 c UCP 500 – How to answer requests to confirm/ advise etc without confirmation

Introduction: A secondary bank can confirm a credit either after an issuing bank has requested or authorized it to do so. A request and an authorization differ as follows:

A request of the Issuing Bank is a commission to effectuate the transaction of business for another (governed according to German law by sections 670, 670 BGB), i.e. an explicit instruction to confirm.

An authorization to confirm a Credit is an offer for an indefinite period of time to conclude a contract regarding the transaction of business for another.

In practice Issuing Banks commonly request another bank to confirm. The Issuing Bank will authorize another bank if it wants to give the Beneficiary the choice whether he/she wants the Credit confirmed and is willing to bear the costs associated with such confirmation.

Article 9 c (i) UCP 500 – Lack of willingness to confirm:

Upon receipt of either request or authorization to confirm the secondary bank needs to notify the Issuing Bank immediately, if it is not willing to confirm the Credit. The validity of this provision is doubtful if no prior business relation exists between the banks; according to German law between merchants silence is considered a rejection. An Issuing Bank hence cannot assume that a secondary bank is willing to confirm if the secondary bank does not react at all. In real life this provision however does not cause problems since issuing banks usually only address requests/authorizations to confirm to corresponding banks with which they entertain a standing business relation.

Article 9 c (ii) UCP 500 – Advise without confirmation:

Absent specific instructions from the Issuing Bank a secondary bank having been authorized or requested to confirm a Credit, may advise the Beneficiary of the Credit without confirming it. The UCP still assume that a secondary bank which does not want to confirm a Credit may at least advise the Credit to the Beneficiary notifying him/her at the same time, that it does not want to comply with the request/authorization to confirm (footnote36). If the secondary bank even lacks the willingness to advise it has to notify the issuing bank without undue delay.

Article 9 d UCP 500 Amendments to Credits

Introduction: Credits are commonly amended after issuance regarding e.g. expiry date, dates of shipments or requirements regarding additional documents. Even if Applicant and Beneficiary agree on these amendments, they are only valid if all parties involved explicitly consent to the amendment. The possibility of a silent amendment, in particular when the beneficiary does not react to the notification of an amendment, does not exist. The agreement between Applicant and Beneficiary to amend a Credit already issued does bind neither Issuing nor Confirming Bank.

Article 9 d (i) UCP – Parties entitled to consent

Subject to the provisions of Article 48 concerning transferable Credits, Issuing Bank, Confirming Bank and Beneficiary have to consent to an amendment to the Credit. The consent of a nominated Bank is not necessary since the nominated bank is not obligated towards the beneficiary. Also, the designation of a bank as nominated bank, can in relation to the beneficiary be cancelled at all times. This is the consequence of the fact that the nominated bank is a sub mandatee of the issuing bank and has to comply with all instructions of the Issuing Bank. This is also true, if the instructions of the Issuing Bank are illicit in regards to the beneficiary, as e.g. in the case that the Issuing Bank designates a bank in a foreign country as Nominated Bank (footnote 37).

Article 9 d (ii) sentence 1 UCP 500 – Binding effect of amendments (Mailbox theory):

Since the 1993 revision the Issuing Bank shall be “irrevocably bound by an amendment(s) issued by it from the time of issuance of such an amendment.”

(footnote38).

This provision is consistent with the mailbox theory and corresponds with the ISP 98 which govern the standby letters of credit (compare Rule 2.03 ISP 98:”A Standby is issued when it leaves an issuer’s control unless it clearly specifies that it is not then “issued” or “enforceable”.”)

The justification for this provision is not convincing. No reason is visible, why the beneficiary’s reliance on the validity of an amendment should be protected already with dispatch, even though the beneficiary has not yet received the notification of amendment.

Since this provision is not relevant in practice, the authors do not discuss, whether the UCP can modify national laws governing contractual obligations by stipulating when a legally relevant manifestation of intent becomes valid.

Article 9 d (ii) sentence 2 UCP 500 – No obligation of the Confirming Bank to modify its confirmation upon receipt of notice of amendment from Issuing Bank:

Even if the Issuing Bank is agreeable to modify an already issued Credit, the Confirming Bank need not adhere to this modification. The Confirming Bank may choose to advise the Beneficiary of the amendment “… without extending its confirmation and if so, must inform the Issuing Bank and the Beneficiary without delay.” “If the Confirming Bank utilizes this option, then it must acknowledge that its confirmation is still valid for that portion of the original Credit not impacted not impacted by the amendment. Moreover, the obligation of the Confirming Bank would cease for that portion of the amended Credit the moment the Beneficiary has accepted the amendment”(footnote39,40).

In the case where the Confirming Bank does not follow the amendment of a Credit by the Issuing Bank, the beneficiary has to decide whether to accept the amendment renouncing his rights against the Confirming Bank or to refuse the amendment, i.e. to use the Credit in its original form including the confirmation.

Article 9 d (iii) UCP 500: Beneficiary has to explicitly accept the amendment:

Whereas in practice a beneficiary can tacitly accept a Credit (for the acquisition of a legal position is advantageous), a beneficiary has to explicitly accept any amendments, since the amendment changes an already existing right. The UCP cannot dispense from the requirement of explicit acceptance, even if the uncertainty if the Beneficary does not react to a notification of amendment is dissatisfactory. The UCP correctly only admonishes the Beneficiary that he “should give notification of acceptance or rejection of amendment(s)”. The Beneficiary need not comply with this invitation. The question whether the Beneficiary has accepted the amendment remains open until presentation of documents. Only upon presentation, the beneficiary has to decide whether the documents comply with the original version or the amendment of the Credit.

“From the Beneficiary’s standpoint, his acceptance of the amendment becomes effective upon his express communication accepting such amendment or upon his tender of complying documents under the amended Credit to the Nominated Bank. The tender of complying documents and the amended Credit is deemed a communication of the acceptance of the amendment by a widely-followed banking practice.”(footnote42)

Article 9 d (iv) UCP 500 – selection among several amendments:

The partial acceptance of changes, contained in one and the same amendment, is not permitted. The picture changes, when the beneficiary has over time received multiple notifications of amendments. In this case the Beneficiary can freely decide which of the amendments he wants to accept:”… although a beneficiary could not accept parts only of a multi-part amendment, he could accept some of a series of separate amendments and reject others.”(footnote43)

Hence: If a bank, which notifies a beneficiary in a series of separate writings of multiple amendments, wants to exclude the beneficiary’s option to accept some and reject other amendments, it has to condition the acceptance of later amendments on the acceptance of all previous amendments.

According to del Busto, Article 9 c (iv) UCP 500 has to be interpreted such, that the partial acceptance contained in a notification of amendment is invalid even if all parties involved consent: “The reason to disallow such a partial acceptance is that if an agreement were reached among the parties, a new amendment covering only the agreed portion of the previous amendment should be issued and agreed upon.”(footnote44).

The author advocates however, that the parties can decide, whether and how they want to document their agreement regarding partial acceptance of an amendment.

Article 10 UCP 500 -- Types of Credit

ARTICLE 10 Types of Credit

A. All Credits must clearly indicate whether they are available by sight payment, by deferred payment, by acceptance or by negotiation.

B. i. Unless the Credit stipulates that it is available only with the Issuing Bank, all Credits must nominate the bank (the "Nominated Bank") which is authorized to pay, to incur a deferred payment undertaking, to accept Draft(s) or to negotiate. In a freely negotiable Credit, any bank is a Nominated Bank.

Presentation of documents must be made to the Issuing Bank or the Confirming Bank, if any, or any other Nominated Bank.

ii. Negotiation means the giving of value for Draft(s) and/or document(s) by the bank authorized to negotiate. Mere examination of the documents without giving of value does not constitute a negotiation.

C. Unless the Nominated Bank is the Confirming Bank, nomination by the Issuing Bank does not constitute any undertaking by the Nominated Bank to pay, to incur a deferred payment undertaking, to accept Draft(s), or to negotiate. Except where expressly agreed to by the Nominated Bank and so communicated to the Beneficiary, the Nominated Bank's receipt of and/or examination and/or forwarding of the documents does not make that bank liable to pay, to incur a deferred payment undertaking, to accept Draft(s), or to negotiate.

D. By nominating another bank, or by allowing for negotiation by any bank, or by authorizing or requesting another bank to add its confirmation, the Issuing Bank authorizes such bank to pay, accept Draft(s) or negotiate as the case may be, against documents which appear on their face to be in compliance with the terms and conditions of the Credit and undertakes to reimburse such bank in accordance with the provisions of these Articles.

Introduction:

Manners of Payment: Article 10 UCP 500 defines the manners of payment (payment, acceptance and negotiation) and the term “Nominated Bank”. Nominated Bank is, regardless of whether the Credit is confirmed or not, any bank, which is authorized to pay, incur a deferred payment undertaking, to accept Draft(s) or to negotiate, except for the Issuing Bank (compare Article 10 b (i) UCP 500). Since the 1993 revision the Issuing Bank is no longer a Nominated Bank: “The reference in UCP 400 sub-article 11 (c ), to the Issuing Bank as also a Nominated Bank is deleted because the liability of an Issuing Bank is now clearly set forth in UCP 500 sub-Article 9 (a).”(footnote45)

Hence only the following banks can be called nominated bank:

- Confirming Bank, when the Credit is payable with it

- A secondary bank, which does not confirm the Credit but with which the Credit is payable

- Any other Bank if the Credit is freely negotiable.

Terminology: [deviation from German text explaining rather “payable”than “Zahlstelle”]

The author uses the terms payable, payment etc. in connection with a Credit to designate not only payment, but also deferred payment, negotiation and acceptance of drafts by the Nominated Bank. A Credit is payable only with the Nominated Bank and only with the Nominated Bank is a Credit payable.

Concerning the responsibility of a Nominated Bank one has to distinguish between confirmed and unconfirmed Credits. A Confirming Bank acting as Nominated Bank, examines the documents and if considered compliant pays the Beneficiary in its own name, not subject to instructions from the Issuing Bank. A Nominated Bank, which has not confirmed the Credit, also examines the documents and pays the documents, however, it is acting on behalf of the Issuing Bank, which can at all times revoke the authorization and issue instructions.

Relevance of using a Nominated bank with unconfirmed Credits:

Even if the designation of a Nominated Bank in an unconfirmed Credit does not create a legal liability of the Nominated Bank towards the Beneficiary (compare Article 10 c UCP 500), this designation transfers the processing of the Credit as follows:

The presentation of documents to the Nominated before the expiry date of the Credit is timely (compare Article 44 a UCP 500).

Absent contrary instructions from the Issuing Bank, the Nominated Bank is entitled and authorized to examine and pay the documents on the Issuing Bank’s account. The confirmation of the Credit or lack thereof is of no bearing on this entitlement/authorization.

Once the documents have been timely presented with the Nominated Bank, the risk of loss when the documents are forwarded to the Issuing Bank is carried by the Issuing Bank and the Applicant.

Article 10 a UCP 500 – Indication of manner of payment

The UCP still distinguish

Sight payment

Deferred Payment

Acceptance

Negotiation.

All Credits hence have to “clearly indicate whether they are available by sight payment, by deferred payment, by acceptance or by negotiation.” (Article 10 a UCP 500).

An unambiguous indication is important, since the above mentioned manners of payment are alternatives; i.e. one alternative excludes another.

A combination of several manners of payment, as easily imaginable between acceptance and negotiation, is still not provided for in the UCP.

Article 10 b (i) sentence 1 UCP 500 – Designation of a Nominated Bank, unless the Credit is freely negotiable

Unless a Credit stipulates that it is only available with the Issuing Bank, “all Credits must nominate the bank which is authorized to pay, incur a deferred payment undertaking, to accept Draft(s) or to negotiate”. Even a negotiable Credit can designate a specific Nominated Bank (so called “straight letter of credit”). Absent any indication in an unconfirmed Credit, the Issuing Bank is the Nominated Bank. Absence of any indication in a confirmed Credit gives the Beneficiary the choice, against which bank he wants to pursue his claims.

Article 10 b (i) sentence 2 UCP 500 – Any Bank as Nominated Bank in freely negotiable Credits

It is the essence of a freely negotiable Credit that the Beneficiary may choose the bank, to which he is going to present the stipulated documents for payment. Hence, any bank is a Nominated Bank. When selecting a negotiating bank, the Beneficiary is not bound by geographical considerations, and can utilize banks in foreign countries or continents. To limit the associated risks for Issuing Bank and Applicant, it seems expedient, to limit the negotiability to certain countries.

Negotiation and timely presentation of documents:

The Beneficiary’s presentation of documents for payment/negotiation to a bank of his liking will be deemed timely even if the bank is not willing to negotiate he Credit. (footnote47). The reason is that a bank which issues a freely negotiable Credit is liable for its reputation and standing being beyond doubt, so that any bank purchasing the beneficiary’s documents can rely on being reimbursed.

Presentations however will no longer we deemed timely if the Beneficiary takes back the documents. Hence it seems practical, that the Beneficiary leaves the documents with the bank first contacted and instructs it to forward them to the Issuing Bank in order to claim payment from the latter. This way the Beneficiary also avoids the risk of loss of the documents in the mail which he would carry when he effectuates dispatch of the documents to another bank or to the Issuing Bank for presentation.

Article 10 b (ii) UCP 500 – First definition of the term “Negotiation”

Up to the revision of 1993 negotiation meant purchase of draft(s) in connection with presentation of complying documents. The 1993 revision extended the meaning of negotiation (see Article 10 b (ii) UCP 500) to comprise the “giving of value for Draft(s) and/or document(s)”. The broad definition of negotiation is vague and prompted the ICC in their position paper No. 2 to clarify as follows:

“The Banking Commission wishes to clarify that for the purposes of UCP 500 the phrase ‘giving value’ in sub-Article 10 (b) (ii) may be interpreted as either ‘making immediate payment’ (e.g. by cash, by checque, by remittance through a Clearing System or by credit to an account) or ‘undertaking an obligation to make payment’(other than giving a deferred payment undertaking of accepting a draft).”(footnote48)

The explanation of the ICC makes clear that “negotiation” means more than mere examination of the documents, the beneficiary rather is entitled to some consideration. However, the reference to the undertaking of an obligation to make payment is ambiguous. Since the Beneficiary is entitled to immediate performance, a bank can only issue an immediately discountable/payable document evidencing its payment obligation.

Difference between payment and negotiation:

In distinction to payment, negotiation means the purchase of documents and/or drafts normally under deduction of interim interest (footnote49). Hence the author convinced, that a negotiation solely of documents (exclusive of documents evidencing a payment obligation) is of little meaning, since it remains unclear, what is being purchased.

For a sight negotiation the ICC Banking Commission has decided, that the sight draft can only be drawn on a party other than the nominated bank (footnote51).

Liability of the Beneficiary as the drawer:

A Beneficiary who issues drafts for negotiation under a Credit runs the (theoretical) risk of being liable as a drawer when the banks illicitly sell his draft and are unwilling or incapable to pay the draft at maturity. However, the UCP do not contain a provision allowing the beneficiary to avoid his liability by adding a statement like “without recourse” to his signature. The absence of such a provision is appropriate, since the admissibility of additions like “without recourse” is an issue determined by national laws on bills of exchange. Contrary to Anglo-American laws on bills of exchange, German law does not permit the drawer to limit his liability (compare Article 9 paragraph 2 WG). The Beneficiary hence has to rely on Issuing/Confirming Bank that they do not sell his draft or use to refinance, or if they do, pay at maturity.

Unconfirmed Credits and Nominated Bank: Negotiation with or without reservation:

If under a payment Credit a Nominated Bank decides to honor documents, of course it cannot return the documents and ask for return of the money arguing that it was not obliged to pay. This issue is treated differently under negotiation credits. It was and remains disputed whether a Nominated Bank which had not yet confirmed the Credit, is obligated to negotiate with or without reservation. (footnote53). Banking practice hitherto tended to negotiate with reservation based on the following decision of the ICC:

“The Commission finally decided that in the terms of Article 3 (a) (iii.) UCP 400 a bank which has not confirmed the credit negotiates with recourse, even though it may be named in the credit as the negotiating bank, and that it negotiates without recourse in the terms of Article 3 (b) (iii.), if it has confirmed the credit.” (footnote54)

The practice -- approved by the ICC and followed by a majority of banks – to pay with reservation has the consequence, that the beneficiary of an unconfirmed negotiation Credit only receives payment provisionally, since the reservation may become relevant if the Nominated Bank does not receive reimbursement from the Issuing Bank or if the Issuing Bank refuses the documents.

Article 10 b (ii) UCP 500 defines as “negotiation” not only the purchase of bills of exchange but also documents; however, in the latter alternative a payment with reservation does not make any sense.

Article 10 – Cancellation of status of Nominated Bank (no explicit provision in UCP):

Since the Nominated Bank acts as a sub-mandatee (German law provides for this relationship in § 664 paragraph 2 BGB) without incurring an obligation towards the Beneficiary, it is has to follow all instructions issued by the Issuing Bank. This is true, even if these instructions – as e.g. an amendment or a revocation of the Credit – are issued without consent of the Beneficiary and hence are void in relation to him. (footnote55) Hence, the Nominated Bank does not have a claim against the Issuing Bank to remain Nominated Bank. This is the consequence of the fact that the Nominated –in distinction to a Confirming Bank—is not a party to the Credit and it needs not consent to amendments (see Article 9 d (i) UCP 500). The possibility of a cancellation of its status as Nominated is something the Nominated Bank has to take into consideration when prepaying the Beneficiary expecting to be refunded through the documents and drafts the beneficiary is to present.

Even though the Issuing Bank can at any time cancel a secondary bank’s status as Nominated Bank under an unconfirmed Credit, it has to make sure before payment, once it received documents directly either from the Beneficiary or a presenting bank, that the secondary bank has not yet received and accepted a second set of documents.

In this situation the decision of the ICC Banking Commission still applies:

“The Restricted credits - negotiation by other than the nominated bank"

"The Commission expressed the opinion that if the issuing bank has nominated another bank as the negotiation bank and documents are not presented to the nominated bank but are forwarded to the issuing bank through a third bank, or by the beneficiary, the issuing bank must pay provided that the documents are compliant and have been received by the issuing bank within the validity of the credit and the Article 47 UCP (1983) period for presentation. However, the issuing bank should take steps to avoid the risk of a second set of documents being presented to the nominated bank.”

Article 10 d UCP 500 – Obligation of the Issuing Bank to reimbursement:

The Issuing Bank has to reimburse a secondary bank acting upon the Issuing Bank’s request or authorization when the secondary bank in compliance with the stipulations of the Credit has examined and honored documents. Article 14 a UCP repeats this obligation, however emphasizing that the bank obligated to reimburse also has to “take up the documents” (see Article 14 a (ii) UCP 500). It needs to be made clear: The Issuing Bank remains obligated to reimburse even if the documents are lost in transit from the nominated Bank to the Issuing Bank and the issuing Bank is prevented from taking up the documents (compare Article 42 UCP 500).

Direct or indirect Reimbursement:

The Issuing Bank can reimburse the secondary bank either directly or as commonly done in currency credits authorize another bank to provide for reimbursement (so called Reimbursing Bank, compare Article 19 UCP 500 “Bank-to-Bank Reimbursement Arrangements”).

Rights of a Bank not authorized by the Issuing Bank:

Unless acting under a freely negotiable credit, a bank cannot base a claim for reimbursement against issuing or confirming bank solely on the fact, that it accepted and purchased documents which comply with the stipulations of the credit. A secondary bank, which accepts or purchases documents without being authorized to do so by the Issuing Bank, does not have a right to reimbursement according to Article 10 d UCP or Article 15 seq. UCP 500. A non-authorized bank has the same legal position as a beneficiary.

The right to reimbursement is subject to all defenses, which Issuing and Confirming Bank have against the Beneficiary; among the defenses count set off with as well as the defense of fraud.

Example: A-Bank in Hamburg, Germany, issues a credit, as Issuing and nominated Bank, for the benefit of Beneficiary B domiciled in Greece; stipulated documents are invoice and bill of lading evidencing shipment from Saloniki to Hamburg. B’s house bank H in Greece negotiates compliant documents even though A-Bank has not authorized it to do so. When A-Bank receives the documents an injunction is issued against it based upon the testimony of the harbormaster, that the goods were seized upon loading on board and were unloaded. A-Bank is not only entitled but obligated to refuse payment due to fraud. H-Bank cannot avail itself of the disclaimers in Articles 15 seq. UCP 500, since H-Bank does not hold the position of a Nominated Bank.

Article 11 UCP 500 – Teletransmitted and Pre-advised Credits

ARTICLE 11 Teletransmitted and Pre Advised Credit

A. i. When an Issuing Bank instructs an Advising Bank by an authenticated teletransmission to advise a Credit or an amendment to a Credit, the teletransmission will be deemed to be the operative Credit instrument or the operative amendment, and no mail confirmation should be sent. Should a mail confirmation nevertheless be sent, it will have no effect and the Advising Bank will have no obligation to check such mail confirmation against the operative Credit instrument or the operative amendment received by teletransmission.

ii. If the teletransmission states "full details to follow" (or words of similar effect) or states that the mail confirmation is to be the operative Credit instrument or the operative amendment, then the teletransmission will not be deemed to be the operative Credit instrument or the operative amendment. The Issuing Bank must forward the operative Credit instrument or the operative amendment to such Advising Bank without delay.

B. If a bank uses the services of an Advising Bank to have the Credit advised to the Beneficiary, it must also use the services of the same bank for advising an amendment(s).

C. A preliminary advice of the issuance or amendment of an irrevocable Credit (pre advice), shall only be given by an Issuing Bank if such bank is prepared to issue the operative Credit instrument or the operative amendment thereto. Unless otherwise stated in such preliminary advice by the Issuing Bank, an Issuing Bank having given such pre advice shall be irrevocably committed to issue or amend the Credit, in terms not inconsistent with the pre advice, without delay.

Article 11 a (i) UCP 500 – principle of immediate effect of telecommunication:

A teletransmission by which the issuing Bank instructs an advising bank to advise a Credit is –absent specific instructions – deemed to be the legally effective obligation of the Issuing Bank (“operative Credit instrument”). The same principle applies to an amendment of a Credit which the Issuing Bank communicated by teletransmission. Important is that the teletransmission needs to be authenticated. It is established practice only to consider properly encrypted messages as valid Issuance or amendment of a Credit. According to Article 7 a UCP 500 (hitherto Article 8 UCP 500) an advising bank has to “take reasonable care to check the apparent authenticity of the Credit which it advises.”

No obligation of the secondary bank to examine superfluous written confirmation: Since the Issuance/amendment of a Credit communicated by teletransmission is effective upon receipt by the secondary bank, the Issuing Bank shall not confirm in writing the previous communication; a modification of legally operative statements is no longer possible. If the Issuing Bank nevertheless mails a written confirmation, the secondary bank need not examine whether the confirmation complies with the original communication, since the confirmation is legally irrelevant (see Article 11 a (i) UCP 500). The issuing Bank hence carries the risk of mistakes in communicating.

Example case No. 5 of ICC Publication No. 535 (E): The Issuing Bank intended to issue a freely negotiable Credit via telecommunication through an advising bank:

· Value USD 60,000

· Covering: 2,200 pieces of computer spare parts

· Part shipments are not permitted

· Mail confirmation of the Credit would be sent.

Due to an error in telecommunication the Advising Bank received a erroneous message:

· Covering 220 pieces of computer spare parts

Due to this mistake the Beneficiary presented documents evidencing shipment of 220 pieces of spare parts, however claiming the full value of the Credit of $ 60,000. According to the correct opinion of the ICC Banking Commission, the Issuing Bank was obligated to reimburse the Nominated Bank, since neither advising nor confirming Bank need to check whether the written confirmation complies with the previous telecommunication.

Article 11 a (ii) UCP 500 –Explicit exclusion of legally operative effect of teletransmitted communications:

If the Issuing Bank intends to exclude the operative effect of the teletransmission, it has to do so explicitly with wording like “full details to follow”. In this case the Issuing Bank should immediately transmit the text of its legally binding obligation via courier or mail.

Article 11 b UCP 500 – Use of an advising bank also for amendments:

If an Issuing Bank has the Credit advised through a secondary bank, the Issuing Bank has to utilize the same secondary bank for the advise of any amendments to the Credit.

Article 11 c UCP 500 – Binding character of pre-advises:

Article 11 c, introduced to protect the beneficiary, binds an Issuing Bank to its pre-advise thus avoiding deceit of the beneficiary. Despite the praiseworthy intention, the enforceability of the provision remains doubtful, since a preadvise commonly only contains an outline of the Credit to be issued (amount, expiry date, goods). It is difficult to imagine how a pre-advise thus worded will be enforced against the Issuing Bank, since the issuing bank is free to decide in its discretion how to fill in the details not covered by the pre-advise (as e.g. shipping dates, requirements for additional documents etc.). In other words: a frame contract, which only outlines basic stipulations of a future credit, will hardly be actionable against the Issuing Bank due to the lack of certainty. If the Issuing Bank nevertheless wants to avoid the liability regarding pre-advises introduced by Article 11 c UCP 500, it has to expressly limit its liability with wording like: ”This message is not a pre-advice in terms of sub-article 11 (c ) UCP 500.”

Liability of the Issuing Bank when the Pre-advice differs from the Credit:

Regardless of a beneficiary’s difficulties to enforce his rights based on Article 11 c UCP 500 (i.e. to have a credit issued which mirrors the pre-advice), an issuing bank should not issue pre-advices if it is not willing or capable to promptly issue the credit. If the Issuing Bank does not issue the credit at all or issues it with exotic stipulations, which makes it impossible for the beneficiary to avail himself of the credit, liability of the Issuing Bank based on misrepresentation cannot be excluded.

Article 12 UCP 500 – incomplete or unclear instructions

ARTICLE 12 Incomplete or Unclear Instructions

If incomplete or unclear instructions are received to advise, confirm or amend a Credit, the bank requested to act on such instructions may give preliminary notification to the Beneficiary for information only and without responsibility. This preliminary notification should state clearly that the notification is provided for information only and without the responsibility of the Advising Bank. In any event, the Advising Bank must inform the Issuing Bank of the action taken and request it to provide the necessary information.

The Issuing Bank must provide the necessary information without delay. The Credit will be advised, confirmed or amended, only when complete and clear instructions have been received and if the Advising Bank is then prepared to act on the instructions.

Introduction: Article 12 UCP 500 and Article 5 UCP 500 are the consequence of the principle of strict compliance with the mandate. Banks, receiving incomplete or unclear instructions regarding advise, confirmation, amendment, are not permitted to interpret or supplement these instructions; rather, they can only forward these instructions for information only to the Beneficiary or request clarification from the issuing bank/Applicant.

Article 12 paragraph 1 UCP 500 – Possibility of preliminary notification of the Beneficiary:

In case of receipt of unclear or incomplete instructions, the bank requested to act on such instructions has the option to not advise the credit and give preliminary notification to the Beneficiary. And the Issuing Bank and secondary bank have this option. Normally this alternative however becomes only relevant for a secondary bank, since the Issuing Bank, which receives unclear or incomplete instructions, has the opportunity to ask the Applicant to clarify.

Check for inconsistencies without duty to give advise:

The correct decision between advise without responsibility and request for clarification requires that the instructed bank has itself checked the text for inconsistencies. If the bank violates this duty and issues a Credit which the Beneficiary cannot use, since the stipulations in the Credit are contradictory or incomplete, it nevertheless is not liable to the Beneficiary, since no contractual relationship exists between the two. (footnote59).

It is the duty of the Beneficiary to check the terms of a Credit, to determine whether they are unambiguous and whether he can satisfy these terms.

Article 12 paragraph 1 sentence 3 UCP 500 – Duty to notify

A secondary bank is obligated to notify the Issuing Bank without undue delay whether due to the incomplete/unclear instructions it does not want to advise the credit at all or whether it wants to preliminarily notify the Beneficiary. If the secondary bank remains idle, i.e. it fails to request the Issuing Bank to provide the necessary information, it might be liable towards the Applicant and Issuing Bank, for the delay in issuing the Credit. (footnote60).

Article 12 paragraph 2 UCP 500 – Obligation of the Issuing Bank supplement its instructions:

Upon request from a secondary bank regarding unclear instructions, the Issuing bank without undue delay has to provide the information asked for. Only upon receipt of complete and clear instructions will the secondary bank advise, confirm or amend the credit, provided it is still willing to perform. A lack of disposition to advise is imaginable in those cases, where the secondary bank is at the same time either Nominated Bank or Confirming Bank, and it does not approve of the new instructions.