New Letter of Credit Rules Call for Careful Review

by David F. Scranton

On Oct. 25, 2006, the International Chamber of Commerce (“ICC”) announced adoption of new rules for commercial letters of credit: the Uniform Customs and Practices for Documentary Credits (2007 Revision), International Chamber of Commerce Publication No. 600 (“UCP 600”).1 These new rules will become effective July 1, 2007 and will replace the existing ICC rules for commercial letters of credit, known as Uniform Customs and Practices for Documentary Credits (1993 Revision), International Chamber of Commerce Publication No. 500 (“UCP 500”). Issuers need to review the new rule changes, consider alternative rules available to govern letters of credit, and modify their policies and procedures accordingly.

UCP 600 Changes
The new rules will affect almost every credit issued under the ICC Uniform Customs and Practices (“UCP”). Most notably, UCP 600 will establish an absolute deadline of five calendar days to review documents and pay or decline a draw, as distinguished from the existing UCP 500 rule that an issuing bank has a reasonable period of time to make the decision. For U.S. issuers, Section 5-108 of the Uniform Commercial Code, as now adopted in most states, provides as a matter of law that an issuer has a reasonable time, not to exceed seven business days, to examine documents and either pay or reject a draw on a credit.2 With the new absolute five calendar day rule under UCP 600, it is possible that many courts will limit an issuer to five calendar days if the credit incorporates UCP 600.

UCP 600 made other changes, including:

– A new rule regarding when addresses of applicant and beneficiary in documents must be the same addresses as stated in the credit.

– The issuer is allowed to refuse documents and then release them upon obtaining waiver of discrepancies.
– When the issuer decides to refuse to honor a draw, it must give a single notice to that effect to the presenter. UCP 600 now specifies in detail what the notice must contain.

– New rules for determining enforceability of issuer-proposed amendments. While an amendment proposed
by the issuer will not generally be enforceable until the beneficiary communicates its acceptance of the amendment to the issuer, a beneficiary that fails to either accept or reject an amendment runs substantial risks. If the beneficiary has failed to give notice that it rejects an amendment, a presentation by the beneficiary on the credit will be deemed to be notification of acceptance of any unrejected amendments by the beneficiary, effective as of the time of presentation.

– A set of definitions of terms.

– A new interpretations section to replace many “Miscellaneous Provisions” in UCP 500.

– A new rule liberalizes the “consistency” requirement of UCP 500 by providing that data in a document, when read in context with the credit, the document itself and international standard banking practice, need not be identical to, but must not conflict with, data in that document, any other stipulated document or the credit. UCP 500 had simply provided that documents stipulated in the credit must not be inconsistent.

– Article 35 appears to expand the risks of liability of the issuer of a credit for the consequences arising out of delay, loss in transit, mutilation or other errors arising in the transmission of any messages or delivery of letters or documents. It does this by narrowing the circumstances in which its limitation of liability applies.