C. Liabilities and Responsibilities (Article 13 to 19 UCP 500)
ARTICLE 13 Standard for Examination of Documents
A. Banks must examine all documents stipulated in the Credit with reasonable care, to ascertain whether or not they appear, on their face, to be in compliance with the terms and conditions of the Credit. Compliance of the stipulated documents on their face with the terms and conditions of the Credit, shall be determined by international standard banking practice as reflected in these Articles. Documents which appear on their face to be inconsistent with one another will be considered as not appearing on their face to be in compliance with the terms and conditions of the Credit.
Documents not stipulated in the Credit will not be examined by banks. If they receive such documents, they shall return them to the presenter or pass them on without responsibility.
B. The Issuing Bank, the Confirming Bank, if any, or a Nominated Bank acting on their behalf, shall each have a reasonable time, not to exceed seven banking days following the day of receipt of the documents, to examine the documents and determine whether to take up or refuse the documents and to inform the party from which it received the documents accordingly.
C. If a Credit contains conditions without stating the document(s) to be presented in compliance therewith, banks will deem such conditions as not stated and will disregard them.
Article 13 UCP 500 Standard for Examination of Documents
Introduction: Standards for Examination of Documents
The examination of documents according to the standard of strict compliance is the central point of Credit transactions. The standard of strict compliance applies for and against the beneficiary. The reason that banks are bound by this non-discretionary standard is that they do not have insight into the relation between buyer and seller and also, due to their lack of industry knowledge, cannot foresee the consequences a deviation from the stipulations in the Credit might have for the Applicant (footnote1). Seemingly unobjectionable variations can have far reaching consequences, and this is not only true in cases where the Applicant has resold the goods by assigning documents of title and himself depends on presenting compliant documents under a back-to-back Credit.
Exclusion of considerations of expedience: Since according to Article 4 UCP 500 all parties involved deal in documents and not in the transactions to which the documents relate, the decision about acceptance or rejection of documents does not depend on if or what economic function the presented documents should fulfill. In the case of Magoronis Navigation Agency, Ltd. v. Henry W. Peabody & Co. of London, Ltd. the English court exemplarily held that the rule “de minimis non curat lex” does not apply to documentary transactions (footnote2).
Inadmissibility of deviations: Contrary to the opinion of Canaris, deviations from the stipulations in the Credit are not admissible even if the Bank without calling in experts can doubtlessly ascertain that the deviation is irrelevant with no negative consequences for the Applicant (footnote3). The same holds true for the opinion of the BGH which decided for a specific case, that “insignificant deviations” should be admissible, if the reasonable assessment of the presented documents lead to the safe conclusion, that the objective of the Credit stipulation has been met (footnote4). This verdict is even less tenable considering that the BGH disregarded clear quantitative stipulations in the Credit. The BGH deemed it sufficient that the beneficiary presented only one copy of a railway receipt certificate [Eisenbahnempfangsbescheinigung], instead of two as stipulated in the Credit. Nevertheless, the BGH held surprisingly in the grounds for judgment that the missing second copy might have facilitated the importation of the goods (footnote5).
In Credit transactions the principles of good faith and considerations of expediency do not apply. Rather the classic wording of a decision of the House of Lords is relevant:
“There is no room for documents which are almost the same, or which will do just as well.” (footnote6)
Admissibility and limits of interpretation: Even though documents need to be examined almost pedantically (footnote7), in real life the question arises frequently how to interpret Credit stipulations and documents (footnote8). The BGH has admitted an interpretation for standbys –the same applies to an L/C—insofar as meaning and objective are discernible from the document itself (footnote9). Even though an interpretation within the context of the Credit is justifiable, US courts still vacillate between “strict compliance” (interpretation limited to the document itself) or “substantial compliance”(analogous interpretation) (footnote11). However, even among the proponents of strict compliance the opinion advances, according to which deviations and inaccuracies, which cannot lead to misunderstandings within the context of the document, are unobjectionable. (Compare the examples and explanations at Article 13 a UCP 500)(footnote12).
Apparent mistakes/inadvertencies: Apparent inadvertencies with names and addresses, e.g. use of small letters for first name, “Voelkers” instead of “Völkers”, are unobjectionable according to the author, even if the ICC Banking Commission shows restraint:
“As typing errors are often in technical expressions, it is not possible for bank employees to judge the importance of such discrepancy, even if it seems to be a minor one. According to our experience it is therefore advisable to amend the error in order not to risk a rejection of the documents. … The reference to typing errors is difficult to answer. Some banks feel constrained by the doctrine of ‘strict compliance’, particularly in their knowledge of the issuing bank concerned. Unfortunately the obvious answer of avoiding typing errors never seems to be pushed. “ (footnote13)
Despite the reserved view of the ICC Banking Commission, the author advocates that obvious mistakes in writing, which do not lead to misunderstandings, are not objectionable. Capital letters/lower case letters/Punctuation:
It is questionable whether a reproduction of the Credit stipulations also needs to comply with the use of small and capital letters. The use of small letters for country names and proper names should be acceptable. It should also be unobjectionable, if inadvertent punctuation seemingly separates previously uninterrupted groupings of words. The Credit stipulated
“salted codfillets with skin, without wings and fishbones”,
the invoice presented repeated the wording however inserted a misplaced comma as follows
“salted codfillets with skin, without wings, and fishbones”. Buyer and Issuing Bank refused payment to the Nominated Bank (which had already honored the documents), claiming that the misplaced comma left open whether the fish contained bones. This objection was irrelevant, since the issuer obviously did not want to make an independent statement when inserting the comma. It remains undecided, in howfar a comma in English language is separating or joining [Chicago manual of Style, 14th edition, page 165 “There are a few rules governing its use that have become almost obligatory. Aside from these, the use of the comma is mainly a matter of good judgment, with ease of reading the end in view”]
The three main criteria for the examination of documents are:
Completeness
Compliance “on their face” with the Credit (Article 13 a sentence 1 UCP 500)
No inconsistencies among documents (Article 13 a paragraph 1, sentence 3 UCP 500)
Examination for completeness/guarantee:
Documents have to be presented in the number of copies stipulated in the Credit. Numbers however can be interpreted [Zusammenhang]. Generally, all documents have to be presented (however compare the rule of interpretation in Article 20 c (ii) UCP 500 for terms like “duplicate”, “two fold”, “two copies”). Transport documents, like bills of lading, if issued in more than one original, need to be presented as the full set so issued (cf. Article 23 a (iv) UCP 500). If even only one copy from the complete set is missing, the whole set has to be rejected as discrepant.
In cases where the beneficiary does not present the correct number of or incomplete documents, he may consider the issuance of a bank guarantee. In real life, in particular when shipping documents have been lost in the mail, it is customary that the bank pays the beneficiary against issuance of a so-called bill of lading guarantee. The decision whether to accept a guarantee instead of the missing document however can be taken by the bank in its sole discretion (footnote15). In no event however can the bank mandated with the examination of documents accept a guarantee to overcome substantive defects of the documents.
Compliance “on their face” (Article 13 a UCP 500):
A Bank has to examine whether the documents presented formally comply with the wording of the Credit and hereby has to follow scrupulously the formal instructions governing its mandate under the Credit (footnote16). This method of examination which is based on formal compliance, without regard to the question whether the objective of the Credit is achieved despite minor discrepancies, seems incomprehensible to some practitioners and a violation of “common sense”. Nevertheless, even results considered by third parties as non-sensical have to be tolerated, since the occasional demands in jurisdiction or academia to loosen the principle of strict examination based on considerations of expediency, would invalidate Credits as an instrument independent of the underlying transaction (footnote17).
Despite the generally accepted principle of strict examination of documents, in real life the question arises, where the limit between inadmissible discrepancy and admissible interpretation of a document lies (compare margin number 143).
Even though an examination “on the face” only checks formal compliance of the relevant core data of a document with the Credit provisions, i.e. the examination does not cover legal validity or authenticity of the document, banks nevertheless cannot ignore conspicuous defects. This applies in particular to obvious forgeries, recognizable without further examination, which often are indicated by erasures or usage of liquid paper. However the decision in Bank of America National Trust & Savings Ass’n v. Liberty National Bank of Trust Co. of Oklahoma City, according to which a bank has to pay attention to “obviously unusual features” should not be followed.
Exclusion of Inconsistencies:
Since the 1993 revision, documents are not acceptable if they are inconsistent with one another. Contrary to Schütze’s view (footnote20), the examination does not require a positive conformity of the presented documents’ content. Rather, in a negative distinction (inconsistency) it is important that the documents do not contradict one another; i.e. the information contained in one document cannot limit or nullify statements in another document, which is required to be presented under the Credit.
When a bank encounters inconsistencies among documents it has to reject the documents, even if each document examined by itself and in isolation would comply with the stipulations of the Credit. (Compare examples in margin number …).
Practice of examination
Article 13 a sentence 1 UCP 500 –Formal Compliance and “could not possibly mislead approach”:
Even though in theory all parties agree on the standards for examination, in real life disputes frequently arise. Advocates of an unconditional faithfulness to the letter confront advocates of an interpretation which takes into account the meaning of a provision; latter’s view is based on the recognition that certain letters cannot be reproduced in all alphabets as e.g. ä becoming ae or ß becoming ss. Even supporters of unconditional faithfulness to the letter of a Credit provision concede that certain discrepancies are permitted:
“If the Beneficiary’s documents contain discrepancies, but the discrepancies are so minor that they ‘could not possibly mislead’ a reasonable document examiner, the discrepancies should be considered harmless and disregarded as a matter of law. This ‘could not mislead’ approach should be considered a part of the strict compliance and not an exception to the rule.” (footnote21)
The following examples demonstrate however that the rule is not consistently applied.
In Beyenne v. Irving Trust Co. the Credit required a document according to which Mr. Sofan should be informed of the arrival of the ship. The presented document with the Name “Mr. Soran” was surprisingly rejected as discrepant (footnote22). Similarly, in Texpor Traders, Inc. v. Trust Company Bank (footnote23) the court considered the following discrepancy not as “trivial or microscopic”:
“Oxford Industries, Inc., Robert Stock Division, Dept OA5, P.O. Box 510, Lyons, GA 30436, attn: Sue Turner”
instead of
“Oxford Industries, Inc., P.O. Box 1618, Atlanta, Georgia 30310”.
The decision in Exotic Traders Far East Buying Office v. Exotic Trading USA, Inc. (footnote24) expresses the opposite extreme; here for reasons of expediency the court accepted an invoice with the delivery term “FOB Korea” instead of the stipulated “FOB Seoul”. This decision, which is not covered by the wording of the document examined, inadmissibly considered that two days prior to arrival of the goods the buyer had received a telex and hence the purpose to avoid unnecessary storage expenses had been satisfied. The following opinion of the ICC Banking Commission however earns approval, since its decision was not guided by the question whether a formally discrepant document could be accepted since no risk of misinterpretation of the incorrect statement existed.
Invoice shows the postal district code under beneficiary’s address as “0256” instead of “2056”
ICC: Discrepancy irrelevant, since zip code of no consequence to L/C and exists for postal use only.
AWB shows the surname of the “Attention Party” named in the AWB as “Chai” instead of “Chan”.
ICC: Discrepancy irrelevant since there might be someone else with exactly this name Chai.
AWB shows beneficiary’s address as “Industrial Parl” instead of “Industrial Park”
ICC: Discrepancy irrelevant, since no danger of an address actually reading Industrial parl.
Article 13 a sentence 3 UCP 500 – Examination for Inconsistency
As already mentioned in the introduction, documents on their face do not have to positively correspond with one another; it is only detrimental if Credit relevant provisions are inconsistent. The following examples illustrate this case:
The ICC Banking Commission has repeatedly expressed its opinion regarding inconsistency. It found inconsistency e.g. if the shipping document added the word “national” to the name of the beneficiary, as it appeard in the invoice:
“’National’ was inserted between X and native on the commercial invoice. In view of UCP 500 Article 13, we regard it as a discrepancy.”
(Notice: Generally the name of the shipper and the name of the beneficiary need not be identical) (footnote25).
The ICC Banking Commission could not agree whether differing weights in shipping document and packing list constituted inconsistency. The FIATA FCR showed the gross weight of tires, whereas the packing list showed the net weight as follows: ”LOADED LOOSE TYRES FOR A TOTAL NET WEIGHT OF KGS 9,500”. Despite the discrepancy between the two documents, the ICC Banking Commission remained undecided:
“There is the opinion on the other side that says rejecting documents for that reason alone is overemphasizing formalistic grounds, which may bring documentary credit interpretation into discredit.” (footnote26).
Article 13 a paragraph 1, sentence 2 UCP 500 – examination with reasonable care according to international standard banking practice
The examination of the documents is the main obligation of a bank. Banks cannot limit this obligation or limit their liability (footnote27). The revision of 1993 introduced the fuzzy concept of “international standard banking practice” which is similarly problematic as an invocation of “international customary law” or “universal commercial law” (footnote28). In case of dispute a bank accepting or rejecting documents invoking “international standards” has to prove the standards’ existence. Under normal circumstances it should be nearly impossible to prove the existence of such a standard, since banks and chambers of commerce of various countries had to be polled.
The praiseworthy intentions of the ICC, to exclude too formal interpretations of the UCP by referencing “international standard banking practice”, will usually fail because of the lack of provability of these standards; however, the provision clarifies that local customs are not to be taken into consideration. In this regard the decision in J.H. Rayner & Co. v. Hambros Bank (Ltd.) (footnote29) earns approval; the American court refused to recognize that due to local custom the terms “coromandel groundnuts” and “machine shelled groundnut kernels” were equivalent:
“The appeal court held that the custom of Mincing Lane was not applicable to “the people in Denmark who know nothing about this practice or usage”, and that bankers are not concerned with the customs of “every one of the thousands of trades” involved in the transaction in which letters of credit are issued. (footnote30)
Article 13 b UCP 500 – Time for examination not to exceed seven banking days:
During the discussions for the 1983 revision all attempts to define “reasonable time” for purposes of examination failed, since the views ranged from 3 to thirty days (footnote31). The 1993 revision introduced a maximum of seven banking days following the receipt of the documents. Only in difficult cases a bank will use the full time limit; normally the examination should not exceed three to four days (footnote32). However, the distinction between normal and difficult cases will be difficult to prove in litigation, hence, none of the parties will likely be able to claim that a bank examined documents for an abusively long time period.
Affected Banks: Contrary to previous revisions, Article 14 b UCP 500 now clarifies that the limit of seven days for the examination of documents applies to “Issuing Bank, the Confirming Bank, if any, or a Nominated Bank”. The consequence is that any bank involved in the processing of the Credit can claim the seven-day limit. According to the view of the ICC, this does not cause a multiplication of the seven-day time limit.
Nevertheless, the beneficiary of an unconfirmed Credit, can not rely on the nominated bank having accepted his documents after an expiration of the seven day time-limit.
(Compare explanation below to Article 14 e UCP 500).
ARTICLE 14 Discrepant Documents and Notice
A. When the Issuing Bank authorizes another bank to pay, incur a deferred payment undertaking, accept Draft(s), or negotiate against documents which appear on their face to be in compliance with the terms and conditions of the Credit, the Issuing Bank and the Confirming Bank, if any, are bound:
i. to reimburse the Nominated Bank which has paid, incurred a deferred payment undertaking, accepted Draft(s), or negotiated,
ii. to take up the documents.
B. Upon receipt of the documents the Issuing Bank and /or Confirming Bank, if any, or a Nominated Bank acting on their behalf, must determine on the basis of the documents alone whether or not they appear on their face to be in compliance with the terms and conditions of the Credit. If the documents appear on their face not to be in compliance with the terms and conditions of the Credit, such banks may refuse to take up the documents.
C. If the Issuing Bank determines that the documents appear on their face not to be in compliance with the terms and conditions of the Credit, it may in its sole judgment approach the Applicant for a waiver of the discrepancy(ies). This does not, however, extend the period mentioned in sub Article 13 (b).
D. i. If the Issuing Bank and/or Confirming Bank, if any, or a Nominated Bank acting on their behalf, decides to refuse the documents, it must give notice to that effect by telecommunication or, if that is not possible, by other expeditious means, without delay but no later than the close of the seventh banking day following the day of receipt of the documents. Such notice shall be given to the bank from which it received the documents, or to the Beneficiary, if it received the documents directly from him.
ii. Such notice must state all discrepancies in respect of which the bank refuses the documents and must also state whether it is holding the documents at the disposal of, or is returning them to, the presenter.
iii. The Issuing Bank and/or Confirming Bank, if any, shall then be entitled to claim from the remitting bank refund, with interest, of any reimbursement which has been made to that bank.
E. If the Issuing Bank and/or Confirming Bank, if any, fails to act in accordance with the provisions of this Article and/or fails to hold the documents at the disposal of, or return them to the presenter, the Issuing Bank and/ or Confirming Bank, if any, shall be precluded from claiming that the documents are not in compliance with the terms and conditions of the Credit.
F. If the remitting bank draws the attention of the Issuing Bank and/or Confirming Bank, if any, to any discrepancy(ies) in the document(s) or advises such banks that it has paid, incurred a deferred payment undertaking, accepted Draft(s) or negotiated under reserve or against an indemnity in respect of such discrepancy(ies), the Issuing Bank and/or Confirming Bank, if any, shall not be thereby relieved from any of their obligations under any provision of this Article. Such reserve or indemnity concerns only the relations between the remitting bank and the party towards whom the reserve was made, or from whom, or on whose behalf, the indemnity was obtained.
Article 14 UCP 500 – Consequences for exceeding the seven-day time limit only for Issuing or Confirming Bank: If Confirming or Issuing Bank do not reject documents within 7 days, the documents are deemed to be accepted. This constructive acceptance however does not apply to a nominated bank, which did not confirm the Credit (footnote34). Hence: for a Nominated Bank it has no consequences if the examination exceeds seven banking days. Even if the nominated Bank – solely acting in its function as nominated bank—accepts and honors the documents without reservation, the beneficiary runs the risk that the Issuing Bank revokes the acceptance of the documents by the nominated bank. This might happen if the Issuing Bank notices discrepancies overlooked by the nominated bank which has a claim for reimbursement of expenses against the Issuing Bank. (footnote35). Observance of the seven-day limit when head office involved in Credit processing: If Credits issued by a branch office stipulate that the documents have to be presented at the head office, the seven day limit is not extended due to the fact that the head office has to communicate with the branch office regarding the acceptance or rejection of the documents: “The Credit did not contain any indication that presentation at the counters of the Bank I’s head office was for administrative purposes only. Therefore, Bank I’s issuing branch had a duty to determine the number of days remaining in the seven-banking-day period after presentation fo the documents at their head office in order to comply with sub-Articles 13 (b) and 14 (d).”
Half banking days when calculating the seven-day limit(footnote 37): Half days count as long as they are considered “banking days”.
“The Banking day is a day on which the issuing or nominated bank is regularly open to conduct letter of credit business; this would include a full or a half day. Conclusion: If an issuing or nominated bank is open on a Saturday to conduct amongst others, letter of credit transactions, the that half day will be classified as one of the ‘seven banking days following the day or receipt of the documents’, or act as the actual date of receipt for the determination of this period.”
The view of the ICC is problematic insofar, as half days are not counted, if the bank is open for money transfers or other banking business, but not for Credit transactions. The author believes that the extent to which a bank transacts business on a given day is irrelevant.
Article 13 c UCP 500 – Irrelevance of non-documentary payment conditions:
Since the 1993 revision banks may disregard conditions in the Credit, which fail to designate the documents which are to be presented to meet the condition. The ICC introduced this provision, since non-documentary payment conditions have in the view of the ICC become the plague of Documentary Credit business. (footnote39)
Validity disputed: Consequence of Article 13 c UCP 500 can only be, not to issue Credit with non-documentary payment conditions. If a bank nevertheless opens a Credit with non-documentary payment conditions, the question arises whether the stipulations in the Credit do precede the standard terms and conditions like provision of Article 13 c UCP 500.
Solution in real life: The banks concerned with the processing of the Credit should advise the beneficiary to issue some document for a non-documentary payment condition, or mention in the invoice that the payment condition has been met.
The ICC’s position paper no. 3 (published in: ICC publication No. 565 (E), page 98):
The introduction of Article 13 c UCP 500 caused a degree of confusion, which convinced the ICC to clarify the issue in an additional publication. In this publication the ICC warns to continue the practice of issuing Credits with non-documentary payment conditions, since banks may disregard these conditions (footnote40). On the other hand, the ICC looks for a solution, if the non-documentary payment conditions can be linked to a specific document (footnote41).
Example: the following stipulation
“vessel instruction: shipment to be by seafreight vessel sailing to Mombasa Port via Suez”
may not be disregarded, since it can be evidenced in a bill of lading and consequently has to be evidenced in the bill of lading (footnote42).
Typical non-documentary payment conditions: Still widely used in Credits are the following provisions:
In case such, contrary to the intentions of the ICC, non-documentary payment conditions become part of a Credit, the bank responsible for accepting the documents should not disregard the payment condition but as a precautionary measure, prompt the beneficiary to confirm on the commercial invoice or other document that the condition has been met. This kind of auto-confirmation by the beneficiary are admissible according to Article 21 UCP 500 (“Unspecified Issuers or Contents of Documents”), provided the Credit does not stipulate otherwise.
Article 14 Discrepant Documents and Notice:
Introduction:
In Credit transactions all parties, and in particular the presenter of documents, depend on a quick decision regarding the acceptance of documents, so that in case of rejection, either the discrepancy can be cured or that the seller can dispose of the goods and documents in other ways. The requirements for a timely and formally correct notice of discrepancy are as follows:
[Beispiel einer korrekten Ruege]
Article 14 UCP 500 consists of two parts:
Article 14 a UCP 500 – Obligation to reimburse:
Issuing and Confirming Bank are obligated to reimburse a Nominated bank which they authorized to examine and or pay the documents; furthermore, Issuing and Confirming Bank are obligated to take up the documents, when the nominated bank has performed the Issuing Bank’s obligation under the Credit.
From a systematic point of view, Article 14 a is misplaced since it does not deal with the appeal process but rather the procedure for reimbursement under a normal processing of a Credit. The Issuing Bank can either reimburse the nominated bank directly (see Article 14 a UCP 500) or use a third party (Reimbursing Bank) (see Article 19 UCP 500)(compare also ICC Publication No. 551 (E), page 7, as well as the explanation at Article 19 UCP 500).
Article 14 b UCP 500 – Documents sole basis for decision:
The decision about the compliance/discrepancy of documents has to be taken solely on the basis of the documents. Other documents than those presented may not be taken into consideration. Since the right to accept or refuse documents lies with the bank, an Applicant’s instructions in this regard are irrelevant, even if the 1993 revision permit to contact him. The passage, that banks may but not have to refuse discrepant documents, is to be understood as follows:
Unless the Applicant approves the discrepancies, a bank has to refuse the documents; a scope of discretion does not exist. Even if the Applicant approves discrepancies, the Bank is not obligated to accept discrepant documents. A Bank will only refuse documents despite receipt of approval of the Applicant in exceptional cases; e.g. if it has not received funds or collateral and it does not consider the Applicant creditworthy; e.g. also, if it has financed the importation and prices have dropped.
Article 14 c UCP 500 Contacting the Applicant:
Notwithstanding the fact that only the bank has the right to accept or refuse documents, since the 1993 revision a bank may contact the Applicant regarding the possible waiver of discrepancies. The Issuing Bank however is not obligated to contact the Applicant. If a Bank decides for whatever reason to refuse discrepant documents in any case, it need not contact the Applicant.
If the Bank however contacts the Applicant it still may not exceed the seven day time limit for examining the documents. Informing the Applicant and inquiry as to waiver of discrepancies does not change the fact that the bank has to decide the question of acceptance or refusal on its own:
“Therefore, the contact with the Applicant is not justifiable if it is designed to allow the Issuing Bank and the Applicant to make a joint decision on the discrepant documents.” (footnote44)
Article 14 d UCP 500 – Timely and formally correct objectionArticle 14 d (i) UCP 500 – Obligation of bank to give notice:The 1993 revision of the UCP 500 clarifies that not only the Issuing Bank but also the Confirming or Nominated Bank can timely and formally correct object to discrepant documents. A Confirming Bank only has an obligation to object, if it is at the same time the nominated Bank; otherwise it can without examination forward the documents to the nominated bank or the Issuing Bank (footnote45).
Article 14 d (i) UCP 500 – Addressee of the objection:
The Issuing or Confirming Bank has to address its refusal to take up the documents either to the bank from which it received the documents or to the Beneficiary if it received the documents directly from him.
Article 14 d (i) and (ii) UCP 500 – Requirements for validity of objection:
A refusal to take up documents is only valid if a bank meets the following three conditions:
Article 14 d (iii) UCP 500 – Reversing the transaction when refusal valid:
If the refusal to take up documents is valid, Issuing and Confirming Bank are entitled to claim from the remitting bank refund, with interest, of any reimbursement. Not provided for is the case that the remitting bank refuses to pay back the reimbursement, since it does not recognize the refusal (footnote47).
According to German law, the secondary bank has to be sued at its place of business, since this is the place of fulfillment for the secondary bank. Also, since the performance characterizing the contract is the execution of the instructions by the secondary bank, the material law at its place of business applies.
According to American law….
Article 14 e UCP 500 – Penalty for untimely or formally deficient refusal only for Issuing and Confirming Bank: If Issuing/Confirming Bank disregard only one of the three conditions, the documents are deemed to be accepted and have to be paid. Article 14 e UCP 500 is the answer to a dissenting judgment of the Commercial court of the canton Zurich (footnote48).
Inconsistent behavior/Good faith:
It is disputed whether a refusal can be void since the examining bank displayed inconsistent behavior. This question arises in particular, if Issuing or Confirming Bank accepted discrepant documents for partial deliveries without objections, however, refused to honor subsequent presentations which objectively did not meet the provisions of the Credit. Generally, the decisions regarding presentation of documents for partial deliveries are independent of each other; i.e. a bank is not bound by a previous (erroneous) acceptance of documents. According to the ICC Banking Commission this does not apply, if the bank recognizes the discrepancy, and after contacting the Applicant, waives the discrepancy without notifying the Beneficiary hereof (footnote49).
One needs to reply to this view, that the refusing bank is under no obligation, to notify the beneficiary, whether its refusal is based on contacts with the Applicant or not.
No unilateral withdrawal of valid refusal:
It is not undisputed, whether the Applicant can unilaterally waive a valid refusal, if e.g. due to price increases he is interested in paying and receiving the goods despite discrepant documents (footnote50). The experts of the ICC Banking Commission correctly held that the release of documents to the Applicant depends on the approval of the presenter:
“If documents are held are the disposal of the remitting bank, the issuing bank would need the consent of the remitting bank for a later taking up the documents after their approval by the applicant.” (footnote51)
In case the bank refuses the documents, the beneficiary can dispose of the goods and documents in other ways; he is not bound by the decision of the refusing bank to unilaterally waive the objection.
The beneficiary has to approve any waiver of refusal.
Article 14 e UCP 500 -- Nominated Bank not subject to rules re: refusal:
If the Nominated Bank has exceeded the seven banking days for examination of the documents, the Beneficiary cannot rely on the legal construction, that the documents are deemed to be accepted. The favoring of the nominated bank is intended with the following argument:
“Therefore, while it is clearly established that a Nominated Bank has only a duty to the presenter to examine documents and to give notice of refusal there is no penalty imposed under the UCP rules of such bank (unless it is the Nominated Confirming Bank) if it fails to act in the manner required by this Article. The UCP cannot impose any direct or indirect obligation on a Nominated Bank (unless it is the Confirming Bank) that acted solely as an Advising Bank and undertook no obligation to pay, accept or negotiate,” (footnote52)
The reasoning of the ICC Banking Commission is problematic, since the nominated Bank when receiving and examining the documents acts on behalf of and authorized by the Issuing and/or Confirming Bank (footnote53); hence it seems tenable to attribute the acts of the Nominated Bank to the Issuing/Confirming Bank. This however, is not the majority opinion.
Article 14 f UCP 500—Payment under reservation:
When banks discover discrepancies they seek to avoid the obvious refusal of the documents. The execution of the underlying transaction in spite of discrepant documents might be in the interest of Applicant and Beneficiary alike (footnote54). A substitute solution to refusing the documents might be the payment under reservation (footnote55).
Option between internal and external reservation:
Since Article 14 f UCP 500 does not oblige the remitting bank to disclose a payment under reservation due to discrepant documents, the remitting bank has the following two options:
In real life, banks commonly make only internal reservations, to avoid that Issuing and Confirming Bank “vexatiously abuse the principle of strict compliance” (footnote56). The ICC Banking Commission does not recognize an unwritten obligation to disclose discrepancies (footnote57). Nevertheless, Isssuing/Confirming Bank should be informed unless the discrepancies are minor or disputable. It does not agree with the standing of a bank in international business, not to disclose obvious and grave discrepancies, in the expectation that the Issuing/Confirming Bank might fail to notice these. In this instance, an external reservation, i.e. full disclosure, is required (footnote58).
Article 14 f UCP 500 – No effect of external reservation on time limit of seven banking days (Article 14 d (i) UCP 500):
If the remitting bank decides to disclose to the Issuing/Confirming Bank that it [the remitting bank] paid the beneficiary under reservation (external reservation), the disclosure has no effect on the calculation of Article 13 b UCP 500, according to which documents are deemed to be accepted unless refused within 7 days of receipt, i.e. Issuing and Confirming Bank being informed by the remitting bank that due to discrepant documents it paid under reservation or against the beneficiary’s issuance of a guarantee, need to refuse the documents within seven banking days, otherwise the documents are deemed to be accepted.
Agreement of payment under reservation:
Requirements and content of an agreement to pay under reservation are not provided for in the UCP (footnote59). [Text der Vereinbarung] Conceptually, a payment under reservation constitutes an advance, which like any other loan, requires an agreement between secondary bank and beneficiary. The beneficiary need not agree to a payment under reservation, if he considers the refusal unjustified. On the other hand, the beneficiary has no claim against the secondary bank for payment under reservation, since this kind of advance is in the discretion of the secondary bank.
An agreement to pay under reservation needs to be worded with great care. The following issues should be addressed: Listing of discrepancies, obligation of the beneficiary to pay on first demand the value of the Credit, interests and expenses if the Issuing Bank for whatever reason refuses the documents. The objective is to avoid, that the beneficiary refuses a repayment with the argument, the refusal of the Issuing Bank is void.
Article 14 (f) UCP 500 – Payment against guarantee: Generally, the remitting bank can effectuate payment against the beneficiary issuing a guarantee to the benefit of the remitting bank thus indemnifying the remitting bank against a refusal of the Issuing bank to accept the documents. A guarantee however is not a substitute for discrepant documents. Despite the guarantee, taking up and payment of the documents exposes the remitting bank to the risk, to act against the interests of the buyer and to get involved in unwanted arguments (footnote60).
ARTICLE 15
Disclaimer on Effectiveness of Documents
Banks assume no liability or responsibility for the form, sufficiency, accuracy, genuineness, falsification or legal effect of any document(s), or for the general and/or particular conditions stipulated in the document(s) or superimposed thereon; nor do they assume any liability or responsibility for the description, quantity, weight, quality, condition, packing, delivery, value or existence of the goods represented by any document(s), or for the good faith or acts and/or omissions, solvency, performance or standing of the consignors, the carriers, the forwarders, the consignees or the insurers of the goods, or any other person whomsoever.
Article 15 UCP 500 -- Disclaimer on effectiveness of documents
Introduction: When examining documents, banks assume no liability for
Article 15 UCP 500 does not relate to the examination of documents, i.e. appearance of the documents on their face with the stipulations of the Credit, which is the main obligation of the banks. Rather it concerns factors outside the formal compliance of documents with the Credit.
Under German jurisprudence it is disputed whether Article 15 is a disclaimer or a negative description of a bank’s performance obligation, i.e. a catalogue of factors which are not part of a bank’s examination. The question is rather academic and arises from the view of certain authors who intended to subject the UCP 500 to German consumer protection laws. The German consumer protection law in question (AGBG) limits a merchant’s power to limit his liability. However the Supreme Court in civil matters decided that Article 15 is valid under German consumer protection laws(footnote62). Article 15, sentence 1 UCP 500.
The validity of the disclaimer for form, completeness, validity etc. has been disputed in academia in regards to the taking up of fraudulent documents, until the German Supreme Court in civil matters decided, that the examination of documents regarding the criteria listed in Article 15 sentence 1 is not a main obligation of the bank, but only a secondary obligation. Disclaimers for ordinarily negligently violations of secondary obligations are valid (footnote63). The consequence is, that a bank is only liable if it grossly negligently did not recognize documentary fraud, i.e. when the documentary defects strike the eye. Example: obvious erasures indicating fraud; use of ordinary copy paper for issuance of a bill of lading, which hints at fraud.
Article 15 sentence 2 UCP 500:
No objections exist to the disclaimer according to which banks assume no liability for the description, quantity, weight, quality, condition, packing, delivery, value or existence of the goods represented by any document(s), or for the good faith or acts and or omissions, solvency, performance or standing of the consignors, the carriers, the forwarders, the consignees or the insurers of the goods, or any other person whomsoever (footnote64).
ARTICLE 16 Disclaimer on the Transmission of Messages
Banks assume no liability or responsibility for the consequences arising out of delay and/or loss in transit of any message(s), letter(s) or document(s), or for delay, mutilation or other error(s) arising in the transmission of any telecommunication. Banks assume no liability or responsibility for errors in translation and/or interpretation of technical terms, and reserve the right to transmit Credit terms without translating them.
Article 16 UCP 500—Disclaimer on the Transmission of Messages
Introduction: Validity and scope of application: The disclaimer of Article 16 UCP 500 is undisputedly valid. The scope of application has to be interpreted according to national law and in case of doubt has to be interpreted narrowly. According to German law the disclaimer does not encompass intentional or reckless acts (footnote65).
Article 16 sentence 1 UCP 500: Disclaimer for errors in transmission and loss of documents:
When using modern means of communications errors in communication cannot be entirely be excluded. The consequences can be substantial as exemplifies the fact pattern which was the basis for the following ICC Banking Commission decision: (ICC Publication No. 535 (E), Case 5).
Per Telex the Issuing Bank had opened a freely negotiable Credit with the following provisions:
· Value USD 60,000
· Covering: 2200 pieced of computer spare parts
· Part shipments are not permitted
· Mail confirmation of the Credit would be sent.
The Advising Bank received a telex message indicating “Covering: 220 pieces of computer spare parts”. The beneficiary presented documents evidencing shipment of 220 pieces. According to the ICC Banking Commission, the Issuing Bank and the Applicant are responsible for the error in transmission and had to reimburse the negotiating bank for the full amount.
In regards to the disclaimer for loss of documents the LG Frankfurt recently decided (appeal pending) that a bank, which uses a courier service in documentary collection, bears the risk of loss of documents. The LG argued that the courier service is an agent of the bank (Erfuellungsgehilfe see Paragraph 278 BGB) (footntoe66).
The judgment is erroneous, since a courier service is an independent entity which performs the carriage of goods according to its discretion (compare Article 29 UCP 500) and not an agent which is subject to instructions from the principal. No difference exists between the transmission of documents by courier and by postal services, latter without any doubt not being agents of a bank.
Article 16 sentence 2 UCP 500 – Disclaimer for errors in translation and/or interpretation: Instead of the translation of Credit language without liability, the alternative provided for in Article 16 sentence 2 UCP 500 of transmitting the terms of the Credit without translating them deserves preference. Under no circumstances should instructions in a foreign language be translated into the national language when issuing or confirming a Credit. The risk of such a translation is exemplified in a judgment of LG Hamburg, which decided on a identical legal situation in the context of indirect bank guarantees. In the case at hand the question was at issue whether an instruction in English language to issue a guarantee was covered by the issuance of a German “suretyship payable on first demand” (footnote67), even though the court affirmed.
Article 17 UCP 500 – Force Majeure
ARTICLE 17 Force Majeure
Banks assume no liability or responsibility for the consequences arising out of the interruption of their business by Acts of God, riots, civil commotions, insurrections, wars or any other causes beyond their control, or by any strikes or lockouts. Unless specifically authorized, banks will not, upon resumption of their business, pay, incur a deferred payment undertaking, accept Draft(s) or negotiate under Credits which expired during such interruption of their business.
The beneficiary cannot plead Acts of God, riots, civil commotions, or any other even listed in Article 17 UCP 500 which lead to an interruption of a bank’s business as an excuse for a belated presentation of documents. In this case the beneficiary will not be paid even when presenting compliant documents. The disclaimer of Article 17 UCP 500 is valid (footnote68). The disclaimer does not cover cases, where the beneficiary presents his documents before occurrence of an act of god and the bank does not examine or pay the documents in time due to force majeure (footnote69).
Article 18 UCP 500: Disclaimer for Acts of an Instructed Party.
ARTICLE 18 Disclaimer for Acts of an Instructed Party
A. Banks utilizing the services of another bank or other banks for the purpose of giving effect to the instructions of the Applicant do so for the account and at the risk of such Applicant.
B. Banks assume no liability or responsibility should the instructions they transmit not be carried out, even if they have themselves taken the initiative in the choice of such other bank(s).
C. i. A party instructing another party to perform services is liable for any charges, including commissions, fees, costs or expenses incurred by the instructed party in connection with its instructions.
iu. Where a credit stipulates that such charges are for the account of a party other than the instructing party, and charges cannot be collected, the instructing party remains ultimately liable for the payment thereof.
D. The Applicant shall be bound by and liable to indemnify the banks against all obligations and responsibilities imposed by foreign laws and usages.
Introduction: Article 18 UCP 500 covers the following topics:
The question whether an Issuing Bank is responsible for a secondary bank depends on whether the secondary bank is deemed to be a person employed in performing an obligation for whom the principal is vicariously liable (Erfüllungsgehilfe § 278 BGB) or sub-mandatee (§ 664 paragraph 1, sentence 2 BGB). An Issuing Bank is not responsible for sub-madatees, however, the disclaimer for intentional and reckless acts for actions of a Erfullungsgehilfe is not valid according to § 11 No. 7 AGBG which is applicable to merchants via § 9 AGBG (footnote70).
Article 18 a UCP 500 – Disclaimer for errors of secondary bank:
As mentioned in the introduction, the liability of the Issuing Bank depends on whether the secondary bank is classified as sub-mandatee or Erfüllungsgehilfe. The same question arises in the relation between Confirming Bank and a secondary bank.
The majority opinion in academia distinguishes as follows:
Advising Bank: The majority view considers the advising bank an Erfüllungsgehilfe with the consequence, that the Issuing Bank cannot avail itself of the disclaimer for mistaken or belated execution of the advise (footnote71)
Secondary Bank: The secondary bank is deemed to be a sub-mandatee, since it does not only mindlessly processes the Credit but independently examines the documents. This view is not shared unanimously and Canaris e.g. argues that the secondary Bank acts on behalf of the Issuing Bank. However this opinion is unfounded, since acting on behalf of a third party does not bar acting independently. Consequently, the Issuing Bank is not liable for mistakes of the secondary bank. This applies in particular to payment of the Credit to a person who is not the beneficiary. The risk of recovering the money lies only with the Applicant (footnote74). Confirming Bank: Usage of a Confirming Bank constitutes substitution (see § 664 paragraph 1, sentence 2 BGB), since the Confirming Bank performs services which the Issuing Bank could not perform itself, i.e. providing the beneficiary with a claim for payment in a foreign country. Hence, the Issuing Bank is not liable for mistakes of the Confirming Bank. Article 18 b UCP 500 – Partially invalid disclaimer when selecting secondary bank: The general disclaimer regarding the selection of a secondary bank is only valid, when the Applicant instructed the Issuing Bank to use a specific secondary Bank. The disclaimer does not cover the case when the Issuing Bank selects a secondary bank at its own discretion (footnote76). The BGH has held that a bank when performing its own obligations cannot disclaim liability for intent or recklessness (footnote77). Article 18 c (i) and (ii) UCP 500 – Responsibility of the instructing party for reimbursement of expenses
Article 18 c (i) UCP 500 clarifies an existing practice that a party, in particular a bank giving instructions, is liable for expenses incurred by the instructed party in execution of the instruction. Article 18 c (ii) UCP 500 additionally stipulates that an instructing party is liable even if it states that a third party will bear the expenses, where the third party fails to comply with this reimbursement obligation. This instance might arise when the Beneficiary lets the Credit expire.
The use of the word “party” instead of “bank” shows that Article 18 c UCP 500 is not only applicable to banks:
“These categories must be broad enough to encompass both ‘banks’ and ‘non-banks’” (footnote78)
Article 18 d UCP 500 – Indemnification against liability imposed by foreign laws:
Article 18 d UCP 500 blends together the question of in how far foreign laws apply to mandates executed in a foreign country and the obligation of the Applicant to indemnify banks for expenses including accidental costs. These costs may be the consequence of applying foreign laws, but in general can be based on the fact that the mandate has to be executed in a foreign country.
Applicable law absent a choice of law: In Credit transactions it is not customary to provide for the applicable law (footnote79). Since the 1986 revision of German international private law, the applicable law is determined by the “performance characterizing the contract” (footnote80). A purchase e.g. is characterized by the transfer of property, whereas a lease is characterized by the permission to use chattel or real estate for a limited period of time, in both instances the transfer of money is an ambiguous characterization of the contract. [2 Saetze zu Article 28 II EGBGB ausgelassen].
The law can be summarized as performance of services or delivery of goods prevails over payment. Consequently: in case of doubt, service contracts – and these comprise the issuance of Credits and bank guarantees—are governed by the law of the mandated bank (footnote81). For the relations of the parties in Credit transactions the following applies:
Applicant/Issuing Bank: Normally both parties reside in the same country, whose law governs the relationship (footnote82). However, this relationship might be influenced by the fact that substance of the bank’s obligation is a promise to pay a beneficiary domiciled in a foreign country, i.e. an international transfer of value (footnote83). This might have consequences for the obligation of the Applicant to reimburse the Issuing Bank for expenses incurred in a foreign country.
Issuing Bank/Beneficiary without using a secondary bank as nominated bank: When the Issuing opens the Credit directly only using a secondary bank to advise the Credit, the Credit is governed by the law of the Issuing Bank (footnote84).
Issuing Bank/Beneficiary when using a nominated bank: Even when using a nominated Bank the Credit is according to the view of Schütze still subject to the law of the Issuing Bank (footnote85). He correctly points out that even after issuance of the Credit, the function of a nominated bank can be transferred to a foreign country and the applicable law cannot constantly change like a “chameleon”(footnote86).
Confirming Bank/Beneficiary: The confirmation of a Credit constitutes an independent (even though joint and several) obligation of the secondary banks towards the beneficiary. According to the criterion of “performance characterizing the contract” this obligation is subject to law of the domicile of the Confirming Bank (footnote87).
Reimbursement for expenses: When applying the BGB, the claim of a bank against the applicant for reimbursement (see §§ 675, 670 BGB) covers all expenses which are necessarily linked to the execution of the mandate or which the bank could in view of the circumstances consider necessary (cf. § 670 BGB). This covers all legal costs, which arise when the bank in connection with the execution of the Credit is entangled in legal arguments. Accidental damages are also reimbursable. This view has been confirmed by the BGH (footnote88).
Article 19 UCP 500 – Bank-to-Bank Reimbursement Arrangements
ARTICLE 19 Bank to Bank Reimbursement Arrangements
A. If an Issuing Bank intends that the reimbursement to which a paying, accepting or negotiating bank is entitled, shall be obtained by such bank (the "Claiming Bank"), claiming on another party (the "Reimbursing Bank"), it shall provide such Reimbursing Bank in good time with the proper instructions or authorization to honor such reimbursement claims.
B. Issuing Banks shall not require a Claiming Bank to supply a certificate of compliance with the terms and conditions of the Credit to the Reimbursing Bank.
C. An Issuing Bank shall not be relieved from any of its obligations to provide reimbursement if and when reimbursement is not received by the Claiming Bank from the Reimbursing Bank.
D. The Issuing Bank shall be responsible to the Claiming Bank for any loss of interest if reimbursement is not provided by the Reimbursing Bank on first demand, or as otherwise specified in the Credit, or mutually agreed, as the case may be.
E. The Reimbursing Bank's charges should be for the account of the Issuing Bank. However, in cases where the charges are for the account of another party, it is the responsibility of the Issuing Bank to so indicate in the original Credit and in the reimbursement authorization. In cases where the Reimbursing Bank's charges are for the account of another party they shall be collected from the Claiming Bank when the Credit is drawn under. In cases where the Credit is not drawn under, the Reimbursing Bank's charges remain the obligation of the Issuing Bank.
Introduction: Direct and indirect Reimbursement: The Issuing Bank can comply with its obligation to reimburse a secondary bank for expenses incurred (i.e. payment of Credit, other expenses) in two ways:
The direct reimbursement between issuing and secondary bank does not raise any problems. In this case the question can arise whether the secondary bank has a claim to be advanced for payments to be made under the Credit.
Problematic are the cases, where the Issuing Bank reimburses the secondary bank via a Reimbursing Bank, which is not involved in the processing of the Credit, in particular does not examine the documents.
Article 19 a UCP 500 – Reimbursing Bank:
The use of a reimbursing bank which is not involved in the examination of documents is customary in currency credits, since in this case the payment made by the secondary bank has to be reimbursed in the currency of the secondary bank’s domicile. The term “reimbursing bank” as used in Article 19 a UCP 500 also covers entities that do not enjoy the status of a “bank”.
Article 19 b UCP 500 – Reimbursing Bank have not obligation to examine documents: The Reimbursing Bank is in no way concerned with examining documents, it is only to pay upon simple demand. For this reason Article 19 b UCP 500 stipulates that the Issuing Bank shall not even require the Claiming Bank to confirm to the Reimbursing Bank that the Credit has been issued. Consequently, the Claiming Bank can demand payment from the Reimbursing Bank with the simple contention, that it has paid the Beneficiary.
Article 19 c UCP 500 – Liability of the Issuing Bank for performance and transfer: The use of a Reimbursing Bank only is on account of performance, hence the Issuing Bank only satisfies its obligation for reimbursement, when the Reimbursing Bank actually pays the secondary bank. Article 19 c UCP 500 clarifies that an Issuing Bank remains liable until reimbursement is received by the Claiming Bank, in other words, the Issuing Bank bears the risk of transfer, a credit entry is not sufficient.
ICC Uniform Rules for Bank-to-Bank Reimbursement (ICC Publication No. 525)
Effective as of July 1, 1996 the ICC Banking Commission has published the Uniform Rules for Bank-to-Bank Reimbursement (ICC Publication No. 525/URR 525). These Uniform rules are to be employed in all cases where the UCP apply; they govern the relationships of the banks involved in reimbursement. The new Uniform Rules however do not prevail over the UCP 500 but supplement Article 19 UCP 500 (see Article 1, paragraph 3 URR 525). In case of doubt Article 19 UCP 500 prevails over the URR.
The URR 525 are characterized by the fact, that they formalistically and in a detail oriented manner provide for the reimbursement procedure. Article 6 a) URR stipulates as a minimum requirement for a reimbursement authorization:
“Credit number, currency and amount, additional amounts payable and tolerance, if any; Claiming Bank; parties responsible for charges.”
Article 9 URR 525 contains requirements to establish an independent obligation of the reimbursing bank towards the Claiming bank. The formalities of a claim for reimbursement are provided for in Article 10 URR 525.
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