A Study on Some Problems and Countermeasures for Applications of the Second Paragraph of Article 35 in the UCP 600 that Covers Documents Lost in Transita

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  • ABSTRACT

    This study analyzes the second paragraph of Article 35 in the UCP 600, which contains a provision covering documents lost in transit. The authors found some problems in the new paragraph and tried to suggest countermeasures for the issuing bank, the notifying bank and the applicant, regarding to the interpretation and application of this article. As a conclusion, The counterproposal of the issuing bank is as follows. Firstly, a more adequate procedure is requested for the required documents to be forwarded to the issuing bank by two subsequent courier parcels. Secondly, if documents are lost, an issuing bank should request copies of documents and data on the sending method from the nominated bank and securely check them They also have to request evidence about the date of presentation of the documents and the expiry date of the L/C and check if the documents were lost in transit. Thirdly, an issuing bank should cooperate with an applicant's L/G request and suggest that an applicant make a request to the shipping company to cancel the L/G. Also a nominated bank should fulfill the conditions and terms of the L/C and maintain copies of complying documents presented under the L/C in order to be protected under the second paragraph of Article 35. Also, when a nominated bank is required to send the copies of documents, they should perform it quickly, comply with the sending manners and methods and maintain the evidence for this action. For an applicant, he should request an L/G. Also, if an applicant himself is credible enough or can reserve a Cash Depot, a single L/G can be considered.


  • KEYWORD

    UCP 600 , Article 35 , second paragraph , nominated bank , lost in transit

  • Ⅰ. Introduction

    The UCP has been maintained since 1933 by the ICC (International Chamber of Commerce) and is the universally recognized set of rules governing letters of credit (Kang, Won Jin, 1998). The latest version, referred to as the UCP 6001, revised by the ICC, came into effect on 1 July 2007. This revision was adopted on 25 October 2006, in Paris, 14 years after the previous revisions.

    Since there are abundant references and studies discussing the main revision of the UCP 600, this study focuses mainly on the new provision, the UCP 600, Article 35, second paragraph (“the 2nd paragraph” herein after), that includes the current revision.

    The new provision is as follows: 『an issuing bank or confirming bank must honour or negotiate, or reimburse that nominated bank, even when the documents have been lost in transit between the nominated bank and the issuing bank or confirming bank, or between the confirming bank and the issuing bank』.

    About the rights and obligations in the case of documents lost in transit, “the 2nd paragraph” stipulates as follows: 『If a nominated bank determines that a presentation is complying and forwards the documents to the issuing bank or confirming bank, whether or not the nominated bank has honoured or negotiated, an issuing bank or confirming bank must honour or negotiate, or reimburse that nominated bank, even when the documents have been lost in transit between the nominated bank and the issuing bank or confirming bank, or between the confirming bank and the issuing bank』.

    The UCP 600 was introduced to support the ICC Banking Commission's official opinions that were announced prior to the revisions for the cases that have no clear provisions. The main theme of this article concerns the clear provision of that of who can be protected and who should be the protector. It was a rule made since the nominated bank can be reimbursed by the issuing bank even though documents were lost in transition. Introducing “the 2nd paragraph” triggered some practical arguments; issuing banks complained that this strengthened their responsibility, and in practice, cases that expressly ex-clude or modify a provision in this article of the UCP 600 have occurred. Besides these arguments, there are some structural problems that did not account for the need for more adequate procedures upon consideration of some real practical cases.

    Usually, documents presented under a credit include transport documents such as B/Ls. Losing these documents can cause serious troubles relating to the rights and obligations among the nominated bank, the issuing bank and the applicant. So, countermeasures should be equipped to ensure proper interpretation and application of the provision.

    In this study, backgrounds, application factors, interpreting arguments and application problems are analyzed. As a result, suggestions for issuing banks are given for each stage: issuing the L/C (Letter of Credit), losing documents, inspecting the documents and issuing the L/G. Suggestions for the nominated bank and the applicant will also be presented to help them to understand and apply the provision properly.

    In fact, there are already many studies about the major contents of the revised UCP 600. However, this article remarkably differs from other studies since it concentrates only on the UCP 600, Article 35, second paragraph, which was not previously studied. This article especially analyzes the background, applicable conditions, interpretation, and some possible problems that might happen in the application of Article 35's second paragraph in the UCP. Also we make suggestions, in detail, about the right application and countermeasure for the issuing bank, nominating bank and applicant.

    1Uniform Customs and Practice for Documentary Credits, 2007 Revision, ICC Publication No.600 (UCP 600 herein after).

    Ⅱ. The UCP provision for lost documents in transition and the ICC interpretation before the UCP 600

       1. The UCP provision for lost documents in transition before the UCP 600

    1) Before the UCP 400

    In terms of the L/C relating to a bank's disclaimer, the UCP Article 12, established in 1933, prescribes that banks assume no liability or responsibility for the damage made during a cable or a telegram transmission, mutilation, other errors, or any delay or loss which occurs in transit.

    The UCP Article 12, revised in 1951, is almost the same as the one from 1933, but supplemented “other mechanically transmitted message” to that of cable or telegram. The UCP Article 10, revised in 1962, and the UCP Article 18 of 1974 also provide that banks assume no liability or responsibility for the delay occurred during a cable or telegram transit, mutilation, other errors, or any delay or loss occurred in transit. Content-wise, this remains the same with the revised UCP in 1951, except that “other mechanically transmitted message” is altered to “telex”.

    2) The UCP 400

    Concerning the loss during the documents transit based on the L/C in the UCP 400's first paragraph of Article 18, revised in 1983, states that “Banks assume no liability or responsibility for the consequences arising out of delay and/or loss in transit of any messages, letters, or documents, or for delay, mutilation or other errors arising in the transmission of any telecommunication.” This is in accordance with previous UCP contents.

    3) The UCP 500

    In the UCP 5002, the first paragraph of Article 16 follows the exact contents of the UCP 400, Article 18 (only the word “and” is added), and provides that banks are not responsible for any delay or loss during documents transit. Therefore, under the previous UCP provisions, including the UCP 500, an applicant or a beneficiary, not a bank, will bear the risk of the possible loss of documents during the sending process.

       2. Banks' common countermeasures of documents lost before the UCP 600

    1) Nominated Banks countermeasure

    When the documents were lost during the transit processed from a nominated bank to a issuing bank, the nominated bank would request a reimbursement from the issuing bank. However, because the original documents were not received, the issuing bank would refuse to reimburse based on the UCP disclaimer provision such as the first paragraph in Article 16 of the UCP 600 (Katsuto, 2002). That was the common defence of beneficiaries and nominated banks for the kinds of incidents above.

    With such incidents above, beneficiaries argued that they possessed no responsibility for the documents after a nominated bank negotiated the documents that complied with the terms and conditions of the credit, because beneficiaries were already finished with the obligation based on the UCP.

    2) Separate sending to avoid complete loss

    In general, unless the L/C exceptionally requires a nominated bank to send the documents in one lot, banks make several copies of a document, sending one to the issuing bank and sending another one after a certain number of days to avoid the complete loss of documents. Even though these kinds of counter-actions were performed, completely preventing document loss was still not possible.

    3) Specifications on L/C Agreements

    Ordinarily, issuing banks specified a provision in L/C agreements that an applicant or a beneficiary is responsible for the loss of documents in transit.3

       3. The interpretation of the ICC on documents losses before the UCP 600

    1) Risk bearing of the Issuing Bank

    The ICC had a consistent interpretation before the UCP 600 that the issuing bank generally takes the responsibility for missing documents sent from the nominated bank to the issuing bank, even though there is no such provision in the UCP. This interpretation is the ICC's arbitrary interpretation (Katsuto, 2002).

    2) Interpretation under the UCP 400

    Under the UCP 400, on April 28, 1987, the interpretation by the ICC relating to this text was concluded as it is cited as follows (ICC, 1989):

    『....the risk passes from the beneficiary to the applicant when documents consistent with their terms of the credit are presented within the period of validity to the bank designated by the issuing bank, whether the credit is payable by payment, deferred payment, acceptance, determined or free negotiation, unless the credit clearly stipulates another modality』. The paragraph citing “....the risk passes from the beneficiary to the applicant” can also alter the beneficiary into the nominated bank, the applicant, or the issuing bank.

    3) Interpretation under the UCP 500

    The ICC was positive that their interpretation about the UCP 400 also suits the UCP 500 when they were questioned about this issue, as in the following response:

    『Article 16 of the UCP offers the same protection to that referred to in your requestion under the UCP 400. If the bank which sends conforming documents to the issuing bank is a nominated bank, then the issuing bank is liable to pay if documents are lost in transit. This would be subject to the documents being sent in the manner prescribed in the credit, ie. where the credit states registered mail, the documents are to be sent by those means and not by courier. The risk of sending the documents by a method not requested by the credit rests with the nominated bank and not the beneficiary』.

    As above, even before the establishment of the UCP 600, in the second paragraph, Article 35, the UCP had admitted a bank's disclaimer about missing documents. In their official opinion, the ICC Banking Commission had admitted reimbursement obligations for an issuing bank.

    2Uniform Customs and Practice for Documentary Credits, 1993 Revision, ICC Publication No.500 (UCP 500 herein after).  3For example, Clause 2, Article 20 of Japan's L/C regulation provides that the losses caused by the missing documents that are not in the charge of an issuing bank are the responsibility of an applicant.

    Ⅲ. Background, Contents and Essential Factors for Application of the Second Paragraph of Article 35 in the UCP 600,

       1. Background

    1) Outline of Article 35 of the UCP 600,

    Article 35 of the UCP 600, is made up of three paragraphs and they provide a bank's disclaimer on transmission and translation. The first paragraph provides the disclaimer for document delay or loss (“disclaimer 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, when such messages, letters or documents are transmitted or sent according to the requirements stated in the credit”). The second paragraph provides that an issuing bank or confirming bank must honour, negotiate or reimburse a nominated bank, even when the documents have been lost in transit and the third paragraph provides the disclaimer for errors in translation or interpretation of technical terms.

    2) Establishing background of “the 2nd paragraph”

    “The 2nd paragraph” follows the basic position of the first paragraph of Article 16 in UCP 500, but the second paragraph constitutes a new addition. Firstly, the first paragraph of Article 16 in the UCP 500 had maintained the position that a bank does not hold any responsibility for documents that are lost during the sending process. “A bank does not hold any responsibility” means that neither the negotiating bank nor issuing bank is responsible for missing documents. According to this, in general banking affairs, a beneficiary or an applicant was supposed to be responsible for this type of incident.

    However, once a nominated bank negotiated the proper documents, it is right to pass the risk of losing documents from a beneficiary to a nominated bank because, after that point, it signifies that the beneficiary already performed his obligations.

    Also, if a nominated bank followed the conditions of the L/C properly, the risk of losing documents should pass to an issuing bank or a confirming bank after the documents are sent (Katsuto et al., 2007). The ICC Banking Commission's official opinions before the UCP 600 have remarked that an issuing bank or a confirming bank must reimburse a nominated bank in the case of lost documents in transit that were sent from a nominated bank to an issuing bank or a confirming bank. “The 2nd paragraph” was newly composed to avoid an arbitrary interpretation of those cases (Katsuto, 2002).

       2. The contents of “the 2nd paragraph” and meanings of the term “nominated bank”

    1) The contents of “the 2nd paragraph”

    “The 2nd paragraph” was prescribed as follows: “If a nominated bank determines that a presentation is complying and forwards the documents to the issuing bank or confirming bank, whether or not the nominated bank has honoured or negotiated, an issuing bank or confirming bank must honour or negotiate, or reimburse that nominated bank, even when the documents have been lost in transit between the nominated bank and the issuing bank or confirming bank, or between the confirming bank and the issuing bank.”

    “The second paragraph quite clearly says that if the documents are presented to a nominated bank and the nominated bank determines that they comply with the terms of L/C and the nominated bank forwards the documents to the issuing bank or confirming bank and they are lost in transit, then the issuing bank or the confirming bank is responsible for what has been honoured or negotiated” (ICC, 2007).

    According to this provision, if documents are lost during transit between 1) nominated banks, 2) a nominated bank and an issuing bank and 3) a confirming bank and an issuing bank, an issuing bank must honour or reimburse the nominated bank whether or not the nominated bank has honoured or negotiated.4

    This article obligates the issuing bank to reimburse the nominated bank even if the documents that were lost during transit were determined to be presentable by a nominated bank. Therefore, in cases of missing documents, there was a provision made for a nominated bank to be protected, but on the other hand, the responsibility of an issuing bank or a confirming bank grew heavier; it eventually made an issuing bank or a confirming bank to reimburse a negotiating bank no matter what.

    2) Meanings of the term “nominated bank” in “The 2nd paragraph”

    Most L/Cs will also involve one or more nominated banks that have a crucial role (Takasagoh, 2008). Their importance can be evidenced by the 51 times the term “nominated bank” is repeated in the UCP 600. However, what does the term really mean and do all 51 citations of the term have the same meaning?

    In general, the term “nominated bank” in the UCP 600 can be interpreted on three levels, depending on its role in the transaction. Specifically, the use of the term “nominated bank” in Article 35 of the UCP 600 is an interesting and significant case. In the paragraph of that article, the term, which is repeated four times, can be interpreted differently in each instance.

    This second paragraph reads, “If a nominated bank (1) determines that a presentation is complying and forwards the documents to the issuing bank or confirming bank, whether or not the nominated bank (2) has honoured or negotiated, an issuing bank or confirming bank must honour negotiate, or reimburse that nominated bank, (3) even when the documents have been lost in transit between the nominated bank (4) and the issuing bank or confirming bank, or between the confirming bank and the issuing bank.”5

    The first and second use of “nominated bank” refers to the “named nominated bank” and “intended nominated bank,” since, in this case, the bank is only required to be the valid place for presentation. However, the third use of the term certainly means the “acting nominated bank”, because only a bank that has already honoured or negotiated a beneficiary`s presentation can obtain the right to be reimbursed by the issuing bank. The fourth use of the term includes all the three levels and is a general term covering all kinds of situations (Sun, 2008).

       3. Applicable condition for “the 2nd paragraph”

    1) After documents are presented, the nominated bank should determine that documents meet the conditions of L/C

    The first applicable condition for “the 2nd paragraph” is that a beneficiary should present the documents to a nominated bank and the nominated bank should admit that the documents fulfil the conditions and terms of the L/C. If a nominated bank has honoured or negotiated due to the determination that the documents fulfil the UCP 600, Article 15 (c)6, the nominated bank must send documents to an issuing bank or a confirming bank based on that provision.

    2) Presented documents should comply with the terms of the L/C

    “The 2nd paragraph” provides that if presented documents are determined to fulfill the L/C's conditions, documents are qualified under UCP 600.

    However, the ICC Commentary on the UCP 600 provides: “As a consequence, discrepancy documents or documents that have not been examined and forwarded to an issuing bank or confirming bank, and are lost in transit, are not covered by Article 35” (ICC, 2007). Therefore, it is necessary for documents to fulfill the terms of L/C. It should be clear that the application of “the 2nd paragraph” does not apply to any sending of discrepant documents (Collyer, 2008).

    This is because, based on the L/C provided in the UCP 600, an issuing bank or a confirming bank is obligated to honour, negotiate, or reimburse under the condition that the documents fulfill the terms of L/C. If discrepant documents are lost during transit through an accident, a bank is not required to carry the obligation.

    3) A Nominated Bank should send documents to an issuing bank

    The next applicable condition requires a nominated bank to send the documents that were presented by a beneficiary to an issuing bank. This also includes a confirming bank sending documents to an issuing bank. However, it should be clear that the application of “the 2nd paragraph” does not apply to any sending of discrepant documents or any sending of documents by a beneficiary directly to an issuing bank (Collyer, 2008).

    4) Only if documents were lost during transit

    Another applicable condition applies only for documents that are lost during transit between a nominated bank and an issuing bank, a nominated bank and a confirming bank, or a confirming bank and an issuing bank.

    5) Sending should have followed the manners and methods stipulated in the L/C

    The last applicable condition requires a sending process of a nominated bank or a confirming bank to comply with the manner and method prescribed in the L/C.

    This condition is not plainly provided in “the 2nd paragraph”, but the first paragraph in Article 35 of the UCP 600 remarks: “A bank assumes no liability or responsibility 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, when such messages, letters or documents are transmitted or sent according to the requirements stated in the credit, or when the bank may have taken the initiative in the choice of the delivery service in the absence of such instructions in the credit.”

    Based on this provision, for a bank to be discharged from the responsibility on missing documents during transit, a bank needs to follow the sending process directed in the L/C.7

    About this point, Gary Collyer, the Technical Adviser to the ICC Banking Commission and the Chair of the Drafting Group on the UCP 600 stated: “When sending documents, a nominated bank must comply with any instructions described in the L/C. A nominated bank would danger its reimbursement claim right (Collyer, 2008).” Also, ICC Commentary on the UCP 600 prescribes: “If a bank makes a business decision to use a delivery service or method different from that specified in the documentary credit8, also called letters of credit (Hahn, 2004), the bank will be liable for any consequences arising out of any delay, loss in transit, mutilation or other errors that may arise and will not be afforded the protection of this rule.” This opinion complies with the position of Gary Collyer (ICC, 2007).

    4If documents are lost in transit between the nominated bank and the confirming bank, the confirming bank must honour, negotiate or reimburse whether or not the nominated bank has honoured or negotiated.  5Numbers (1) through (4) are assigned arbitrarily by authors to emphasize each nominated bank.  6“When a nominated bank determines that a presentation is complying and honours or negotiates, it must forward the documents to the confirming bank or issuing bank”.  7The risk of sending the documents by a method not requested by the credit rests with the nominated bank and not the beneficiary.  8For example, if the bank uses Courier Company A instead of Courier Company B, as called for in the documentary credit, or elects to send the documents in one courier mailing rather than two, as required by the documentary credit.

    Ⅳ. The Interpretation and Problems for Application the Second Paragraph of Article 35 of the UCP 600,

       1. Contradiction caused by juxtaposing the first and second paragraph

    The first paragraph of Article 35, like Article 16 in the UCP 500, signifies that a bank is not obligated concerning the missing documents during transit. However, the second paragraph, which describes some limited exception to the first paragraph, remarks that an issuing bank is obligated to honour, negotiate and reimburse a nominated bank, if documents, that meet the conditions of the L/C, are lost during transit from a nominated bank to an issuing bank. Therefore, there is a contradiction between Article 35's first and second paragraph when they are juxtaposed.

       2. Issuing bank's argument against its heavier responsibility

    As mentioned above, the establishment of the second paragraph of Article 35 offered more protection to nominated banks. On the other hand, an issuing bank's responsibility grew heavier. Therefore, if there are missing documents, an issuing bank had to reimburse a nominated bank when a nominated bank requests it (Suku Kunihiko, 2007). Although these types of incidents are rare, the UCP 600 established an article to deal with the possibility if it were to arise through the incorporation of “the 2nd paragraph”. However, the provisions above burdens banks engaged in trade and finance, especially issuing banks and confirming banks. Some issuing banks even suggested that their documentary L/Cs must contain a clause stating that “the 2nd paragraph” is not applicable (George, 2007).

       3. Exclusion and reforming the Article in practice

    When the first draft of this article was made, the ICC Japan Commission objected to the ICC headquarters because banks could require reimbursement without any evidence, such as the copies of documents, by distorting the meaning of the article. However, this objection was not accepted (Kunihiko, 2007).

    The ICC did not explain about this issue because they believed that there would not be any special problem if nominated banks keep reporting the copying of documents to issuing banks as it had been the practiced before.9

    However, after the effectuating of the UCP 600 in July 2007, there have been many cases of expressly excluding or modifying a provision in this article of the UCP 600.

    Here are few cases: 1) Turkey A Bank and Hong Kong B Bank inserted “the 2nd paragraph” is not “applicable / applied” to the L/C and eventually made it mean the same as Article 16, UCP; 2) Hong Kong D Bank's L/C obligated nominated banks to send a copy of documents to check documents in issuing banks10 and 3) Taiwan M Bank clearly has been refusing payment or reimbursement to nominated banks.11

       4. Absence of an adequate process for the loss of documents

    By reading the 2nd paragraph of Article 35, I could confirm that there is no other suggestion provided about any stipulated procedure to follow in case of loss of documents. That is, “the 2nd paragraph” simply states some facts without offering some practical, flexible methodologies to practice those facts (George, 2007).12

    As mentioned above, when the first draft of UCP 600 was composed, the ICC Japan Commission had requested for an amendment to this stipulation. The major conflict was about whether to leave the second paragraph of Article 35 as it is or to delete the second paragraph. They also suggested that an issuing bank should be able to receive the required documents that had been forwarded. A nominated bank's proof of a complying presentation can be an adequate process here (Katsuto et al., 2007).

    This is because a nominated bank might make a significant mistake in its sending process, and this does not obligate an issuing bank to reimburse a nominated bank. Consequently, the amendment request of the ICC Japan Commission was not accepted and this sentence was added to the original text.

    As shown in these cases, banks had many concerns about this provision. However, since it is already composed as a provision, an important factor would be what is the banks' appropriate countermeasure towards this issue.

    9In the practical case of missing documents during the transmission from a nominated bank to an issuing bank, the issuing bank asks the nominated bank to reissue the documents, and the nominated bank asks the exporter to reissue the shipping documents and to re-send the documents. At the same time, via the exporter, the nominated bank will try to find ways to deliver cargos with the shipper. Finally, with agreements of all parties related to the transaction, reimbursement would be concluded.  10“The issuing bank shall be entitled to request the nominating bank to send copies of all the documents presented under the credit and which the nominating bank has determined to be complying. The issuing bank should be entitled to examine the copies of the documents to determine if they comply with the terms of the credit. Article 35, to the extent of being inconsistent with the foregoing, is expressly excluded”.  11“Notwithstanding the provision of the UCP 600 Art. 35, the issuing bank of this credit shall not reimburse the nominated bank (or confirming bank) when the documents required have been lost in transit between the nominated bank (or confirming bank) and the issuing bank”.  12The facts stated are: 1) documents were complying, 2) the nominated bank had forwarded them, 3) the documents have been lost and 4) the loss occurred during transit .

    Ⅴ. The Countermeasures to the Application of the Second Paragraph of Article 35 of the UCP 600,

       1. Issuing bank

    1) In issuing the L/C

    (1) Specify the manner and method for safe sending

    When issuing an L/C, the issuing bank must specify the method of sending separately, using the terms of credit. Usually, the issuing bank provides directions to the negotiating bank such as “ALL DOCUMENTS MUST BE FORWARDED DIRECT TO THE ISSUING BANK IN TWO CONSECUTIVE SETS BY REGISTERED AIRMAIL.” Also, when an issuing bank makes the L/C conditions, the bank should nominate safe methods to send documents,such as credible couriers:“DRAFTS AND ALL DOCUMENTS MUST BE SENT TO US FOR YOUR REIMBURSEMENT BY DHL COURIER SERVICE.”

    (2) Proper practice of separate sending

    One of the worst troubles in losing documents is losing the B/L, the document of title. Numbers of the original B/L's are issued, so if the L/C demands a bank to send documents twice, it could lessen problems caused by missing documents.

    Methodology on sending documents is generally printed in the L/C and although there is no specific stipulation, a negotiating bank normally separates shipping documents and drafts into two parts. It forwards the originals by airmail and sends a duplicate at least a day after to avoid losing documents. In order to minimize the number of lost documents en route and the consequent inconvenience of the involved party, it became standard banking practice to produce documents in two sets and mail them separately on different dates (George, 2007).

    (3) Adequate pre-explanation for an applicant

    An issuing bank should give an explanation to an applicant as listed: 1) even though the documents are lost in transit, if the second documents (copies) that are sent separately from the original copy can fulfill the terms of credit, an issuing bank should be reimbursed,13 2) if a full set of the original B/L's are lost in transit, the L/G and deposit are required14 and 3) in the case of freight delivery by L/G, even if the documents (copies) do not fulfill the terms of credit, issuing banks should be reimbursed.15

    (4) Stipulation on an expressive exclusion provision concerning “the 2nd paragraph”

    If the L/C does not stipulate any separate sending, to expressively exclude an application of “the 2nd paragraph”, a provision should be remarked upon such as: “reimbursement is not obligated if the original documents are not accepted”.16 Also, it is proper to specify the purposes of the UCP's second paragraph,17 Article 1, in the L/C (Katsuto et al., 2007).18

       2) On missing documents

    (1) Request to a nominated bank for sending of copies

    An issuing bank can request a nominated bank or a negotiating bank to send copies of documents to check if the documents meet the terms of the L/C.

    Also, the ICC Commentary on the UCP 600 explains: “In order that an issuing bank may carry out a review of the documents to establish compliance to the terms and conditions of the credit, it may request that the negotiating bank (or nominated bank) obtain copies of the transmitted documents” (ICC, 2007) and Gary Collyer, the Chair of the Drafting Group of the UCP 600, is of the same position (Collyer, 2007).

    (2) Request for confirmation of compliance of the manner and method of sending

    An issuing bank should request data from a nominated bank, such as a courier's copies of receipt, to confirm the manner and method of sending complied with the conditions of the L/C. If the document did not comply with the terms of the L/C, an issuing bank could claim that the nominated bank is not covered by the second paragraph of Article 35 (Hidenori, 2008).

    (3) Request evidences to check that documents are lost in transit

    In some cases of missing documents, a nominated bank itself could have made significant mistakes. Therefore, an issuing bank can request and confirm evidential documents19 that show documents lost in transit as the fault of the nominated bank. After checking, if the documents were not lost in transit, an issuing bank could claim that a nominated bank is not covered by the second paragraph of Article 35.

    (4) Request to confirm the presentation period and expiry date of the L/C

    Documents meeting the terms of the L/C means that those documents are presented by the date of the document presentation and the expiry date of the L/C. It also indicates that an issuing bank should request and check the data regarding issues, such as cover letters, copies or a nominated bank's certificate of the documents.

       3) In checking the copies of documents

    (1) Quick examination

    After receiving documents, an issuing bank should examine them thoroughly and honour them if they determine that the documents meet the terms of the L/C. However, in the case of non-complying documents, an issuing bank can refuse reimbursement to the nominated bank (ICC, 2007). In the line of UCP 600, Article 14 (b), the issuing bank shall check the documents within a maximum of five banking days following the day of presentation to determine if a presentation is complying.

    (2) Quick reimbursement

    In the case of complying documents, even though there is no specific provision on the date limitation about reimbursement under the UCP 600, they need to reimburse as soon as possible once they determine the documents comply with the L/C (Gary Collyer, 2008).

       4) In relating to the L/G

    (1) In case of requesting the L/G

    If a full set of original B/L's are lost and the applicant requests the L/G when the ship arrives at port, the issuing bank is required to cooperate with the applicant unless there is a specific problem in doing so.

    (2) Suggesting a cancellation of an L/G to the Applicant

    In the case of the L/G, if an original B/L arrives later, the L/G should be returned to the shipping company with a cancellation of the guarantee. However, if a full set of original B/L's are lost in transit, this is not applicable. Practically, this is a significant countermeasure, as a shipping company can suggest to the applicant to expire the L/G to that shipping company.

       2. Nominated bank

    1) Fulfillment of applicable conditions of “the 2nd paragraph”

    As mentioned above, based on “the 2nd paragraph”, in order for an issuing bank to be obligated to honour or negotiate with a nominated bank: 1) the documents are presented to a nominated bank, 2) the nominated bank determines that they comply, 3) the nominated bank forwards the documents to the issuing bank or confirming bank, 4) they are lost in transit and 5) they are sent complying to the manner and method directed in the L/C (Collyer, 2008). Therefore, a nominated bank or a negotiating bank, which later could request for a reimbursement, should confirm fulfillment of the L/C conditions and sufficient documents.

    2) Copies of complying documents presented

    A nominated bank has to make a copy of documents to prove that their documents complied with the conditions of the L/C, but obtaining copies could be a problem.

    If a beneficiary, who requests for documents to be honoured, is a continuous client of a nominated bank, there will be no problem. However, if a beneficiary is bankrupt and missing, copies of documents lost in transit are not available to be obtained. Therefore, foreign nominated banks, which do not exchange FETA (Foreign Exchange Transaction Agreement or Agreement of Commercial Letter of Credit) with beneficiaries, should maintain a copy of each of the documents. This process takes a lot of effort and expense, but this kind of active countermeasure reduces the possibilities of trouble later on.

    3) Quick provision of copies of documents

    Based on “the 2nd paragraph”, a nominated bank has to provide an issuing bank with copies of documents to prove that the documents fulfilled the required conditions and to be protected. Therefore, if an issuing bank requests for the sending of copies of documents, a nominated bank should respond as soon as possible for reimbursement.

    4) Complying the manner and method of sending throughly and ensuring evidences

    A nominated bank should comply with all the methods and demands about sending as guided in the L/C. An issuing bank's reimbursement obligation for the nominated bank, based on this article, is under the supposition that a nominated bank followed the procedures and methods given in the L/C, but the documents are lost.

    Thus, for example, if a nominated bank sent one lot of documents despite an issuing bank requiring the nominated bank to send documents separately, the issuing bank could refuse reimbursement to the nominated bank because they did not fulfill the terms of the L/C. Therefore, it is very important for a nominated bank to maintain the sending route of documents and evidences that documents complied with the terms and conditions of L/C.

       3. An applicant

    A common countermeasure of an applicant is to request the issuing of an L/G. However, because this is appropriate when an applicant has credit in an issuing bank, this process can be achieved with the bank's cooperation.

    If the applicant has enough credit or can reserve a Cash Depot to the shipping company, the freight can be transferred to the applicant by a single L/G. Also, if an applicant admits usance, a T/R (Trust Receipt, Receipt for goods that are to be held in trust for the lender) is additionally needed as well, and canceling this is also needed, concerning the B/L that is lost (Katsuto et al., 2007). If the B/L is lost, the shipping company also cannot have the bank's L/G canceled; thus it is right to find a solution that does not negatively effect the shipping company.

    13Agreement of Commercial letter of credit Japan, Article 11 (1)  14Agreement of Commercial letter of credit Japan, Article 20 (2)  15Agreement of Commercial letter of credit Japan, Article 11 (2)  16Under UCP 500, ICC Option R.548, a written opinion by ICC Banking Commission concluded as: “Not the fact that the reimbursement instruction in the credit reads 'Upon receipt of full set of documents in conformity with the L/C terms, we will effect payment as per your instruction,' by virtue of Article 16 the issuing bank would be obliged to honour a compliant presentation that had been negotiated by a nominated bank but lost in transit. The reimbursement obligation under a credit is not subject to the receiving of documents by the issuing bank, but only to a compliant presentation being made to the nominated bank. The reimbursement clause in the credit does not make the reimbursement subject to the receiving of documents.”  17They are binding on all parties thereto unless expressly modified or excluded by the credit.  18If an issuing bank specifies in the L/C that they refuse to reimburse unless they accept the documents, an issuing bank is not obligated to reimburse.  19For example, copies of reply letters from courier companies for issuing banks' inquiries to confirm the delivery of the documents.

    Ⅵ. Conclusion

    In this text, regarding the second paragraph of Article 35's interpretation of the UCP, some problems in the application of the UCP and countermeasures about missing documents in transit are presented. This study analyzes the background, applicable conditions, interpretation, and some possible problems that might happen in the application of the UCP's second paragraph of Article 35, and tries to support the banks and the applicants' right application and countermeasure to the second paragraph of Article 35.

    As a conclusion, firstly, a more adequate procedure is requested for the required documents to be forwarded to the issuing bank by two subsequent courier parcels (Dan Taylor, 2008). Also, separate sending should be settled as a standard practice and be remarked upon in the L/C. It is also necessary to explain to applicants about the application and interpretation of this provision. Also, establishing a clause to exclude the provision of the second paragraph and the purposes of the second paragraph, Article 1, should be properly applied.

    Secondly, if documents are lost, an issuing bank should request the nominated bank for the copies of documents and data on the sending method and securely check them. They also have to request evidence about the date of presentation of documents and the expiry date of the L/C and check if the documents were lost in transit. Thirdly, when examining the copies of documents, it should be performed within a maximum of five banking days and lead to a quick reimbursement if they determine that the documents fulfilled the conditions of the L/C.

    Fourthly, an issuing bank should cooperate with an applicant's L/G request and suggest an applicant make a request to the shipping company to cancel the L/G.

    In order to be protected under the second paragraph of Article 35, a nominated bank should fulfill the conditions and terms of the L/C and maintain copies of complying documents presented under the L/C. Also, when a nominated bank is required to send the copies of documents, they should perform it quickly, comply with the sending manners and methods and maintain the evidence for this.

    For an applicant, he should request a L/G for a freight transfer. Also, if an applicant himself is credible enough, or can reserve a Cash Depot, a single L/G can be considered. The issue of a contradiction caused by juxtaposing the first and second paragraphs of Article 35 or expressly excluding or modifying this provision in articles of the UCP 600 should be publicized through the ICC's official opinions or guidelines in future.

    The UCP 600, second paragraph, Article 35, provides reimbursement provi sion for missing documents in transit between: 1) a nominated bank and an issuing bank, 2) a nominated bank and a confirming bank and 3) a confirming bank and an issuing bank.

    Nevertheless, this study was limited to the case of missing documents in transit between a nominated bank and an issuing bank. In the future, studies should examine the provisions between a nominated bank and a confirming bank, as well as a confirming bank and an issuing bank.

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