Excluding UCP 600 Articles 7(c) and 12(b): What Does It Really Mean?

Banks occasionally issue letters of credit that exclude one or more provisions of UCP 600. However, merely excluding an article without explaining the intended consequence may create uncertainty for beneficiaries and banks handling the credit.

The following question examines the effect of excluding articles 7(c) and 12(b) of UCP 600.

Question

Dear Mr. Old Man,

An L/C contains the following clause:

“ARTICLES 7(c) AND 12(b) OF UCP 600 REVISION 2007 ARE EXCLUDED IN THIS L/C.”

By simply excluding these articles without any further explanation, does it mean that the opposite applies?

For example, by excluding article 7(c), does it mean that the issuing bank no longer undertakes to reimburse a nominated bank that has honoured or negotiated a complying presentation and forwarded the documents to the issuing bank?

If that is not the intended consequence, shouldn’t the issuing bank clearly explain what it intends to achieve by excluding these articles?

Can issuing banks be more responsible, please?

Gabriel

_______

Answer

Dear Gabriel,

Thank you for your interesting question.

Article 7(c) of UCP 600 provides that an issuing bank undertakes to reimburse a nominated bank that has honoured or negotiated a complying presentation and forwarded the documents to the issuing bank.

Article 12(b) provides that, by nominating a bank to accept a draft or incur a deferred payment undertaking, the issuing bank authorizes that nominated bank to prepay or purchase the accepted draft or deferred payment undertaking.

Simply excluding articles 7(c) and 12(b) does not automatically mean that the opposite of those provisions applies. It merely means that those provisions of UCP 600 no longer govern the credit. The practical consequences must be determined from the remaining terms and conditions of the credit.

In many cases, such exclusions suggest that the issuing bank intends the credit to be available only with itself and does not intend to create the reimbursement or prepayment framework contemplated by articles 7(c) and 12(b). However, that intention should be expressly stated in the credit rather than left to implication.

Accordingly, if the issuing bank intends the credit to be available only with itself by payment, acceptance or deferred payment, the credit should say so expressly. Simply excluding UCP 600 provisions without specifying the intended alternative may create unnecessary uncertainty for the beneficiary and banks handling the presentation.

Any bank that honours or negotiates under such a credit without first understanding the effect of the exclusion may expose itself to reimbursement risk if the issuing bank later takes the position that no undertaking under article 7(c) exists.

I have also come across credits that expressly exclude article 7(a) of UCP 600, which sets out the issuing bank’s undertaking to honour a complying presentation.

One example is a credit issued under a financing arrangement with an international development institution, such as the Asian Development Bank (ADB). Under such arrangements, reimbursement is ultimately funded by the international organization, which issues a separate reimbursement commitment after the credit has been issued. In that context, the exclusion of article 7(a) reflects the special structure of the transaction rather than an attempt by the issuing bank to avoid its obligations under an ordinary commercial documentary credit.

In short, excluding provisions of UCP 600 should never be done casually. Whenever an issuing bank intends to depart from the standard allocation of rights and obligations under UCP 600, it should clearly state the intended effect. Otherwise, beneficiaries and banks may be left to infer the issuing bank’s intention, potentially leading to misunderstandings, reimbursement disputes and avoidable risks.

Regards,

Mr. Old Man