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Banking Alert, December 2006
 

New Letter of Credit Rules Call for Careful Review
Stradley Ronon Launches Mortgage & Lending Litigation Group

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.

- It details when an issuer is entitled to treat documents as “original” where original documents are required under the credit or applicable rules.

UCP Compared to ISP98
Both versions of the UCP differ significantly from the International Standby Practices (1998), International Chamber of Commerce Publication No. 590 (“ISP98”), which are alternative rules developed by the ICC to govern standby letters of credit (credits supporting the performance of a contract or obligation) as distinguished from commercial or trade letters of credit (normally issued to support the purchase and sale of goods in transit). Most notably ISP98 provides that:

- An issuer is expressly permitted to sell participations and disclose information about the applicant to potential participants.

- A credit may be transferred in its entirety more than once, and partial transfers are prohibited; ISP98 also allows an issuer to establish conditions for a transfer. Under the UCP, a credit may not be transferred
more than once, but partial transfers are allowed,
and the UCP does not expressly permit an issue to establish conditions.

- A failure to make a scheduled presentment does not waive the right to make other timely presentments.

- If the place for presentment is closed on the last business day for presentment and this causes presentment not to be made, the last day for presentment is automatically extended to 30 calendar days after the place for presentment re-opens. The issuer is given the unilateral authority to designate an alternate place of presentment.

- Presentments may include inconsistent documents.

- Specific requirements apply to demands for payments and statements of default.

- The same rule requiring payment or rejection within a reasonable time applies as was contained in UCP 500 (now shortened to five calendar days in UCP 600), but ISP98 also establishes a three calendar day safe harbor within which notice of dishonor is deemed to be reasonable. As noted above, Article 5 of the Uniform Commercial Code has provisions on this subject which may change this rule in a particular state. Whether it does will depend on which version of Article 5 the state has adopted and how the state’s courts resolve conflicts between state law and these customs and practices if a letter of credit states that it is governed by both.

- The issuer may waive the requirement for presentment of the original credit if it has been lost, stolen or destroyed.

- The issuer does not have an obligation to verify the identity of the party making a presentment.

- On rejection, a statement of discrepancies need not be detailed, and an issuer need not specify that the reason for rejection is that presentment was made after the expiration date.

- The issuer may waive certain provisions of a credit without affecting the applicant’s reimbursement obligations.

- An issuer may determine whether conditions of a credit are satisfied from its own records or within its normal operations.

- A dishonoring issuer is not required to give notice of the disposition of presentment documents.

Recommendations
Bank issuers of letters of credit should review the new UCP 600 rules carefully before they become effective July 1, 2007. Because the new rules will soon reflect (or will be deemed by courts to reflect) customary credit practice, if you choose to continue to have your credits governed by the UCP, you should revise your standard credit language to refer to the new UCP 600. You should also modify your policies and procedures to ensure that you administer your letters of credit according to the new rules.

Before you finish your evaluation of UCP 600, you should also consider whether to change the administration of your standby letters of credit to have them governed by ISP98. An increasing number of banks are issuing their standby letters of credit under ISP98, which offers a number of benefits to issuers. Most importantly, the ISP98 rules are often easier and clearer to apply than the UCP rules in the context of standby letters of credit.


1 ICC, Banking Commission Approves Revised Rules on Documentary Credits (Oct. 25, 2006), at http://www.iccwbo.org/iccjcde/index.html.

2 Former Section 5-112 of the Uniform Commercial Code, in force in those states that did not adopt the 1995 amendments to Article 5 of the UCC, requires an issuer to act within three banking days.



SPOTLIGHT

Stradley Ronon Launches Mortgage & Lending Litigation Group


To better serve our financial institution clients, the firm has formed a Mortgage & Lending Litigation Practice Group. Comprised of twelve core attorneys, the group collectively has more than 100 years of experience representing financial services and other clients in litigation, lending and class-action claims.

“For more than 75 years, our firm has represented financial institutions in their business dealings, defending lenders against almost every type of claim,” said Andrew K. Stutzman, chair of the recently formed group. “Coupled with our depth and breadth of regional and national experience in all courts, including bankruptcy, we have the cross-discipline ability to represent clients in any mortgage and lending litigation matter.”

The Mortgage & Lending Litigation Practice Group’s capabilities include:

• Mortgage Origination and Servicing Litigation

• Credit Reporting and Collection Practices Litigation

• Complex Residential Foreclosure Litigation

• Lending Discrimination Claims

• Class Action Litigation

• Short-Term Loan Products

• Commercial-Lending Fraud Protection and Extraordinary Remedies

• Commercial-Lender Liability Defense

• Government Affairs and Regulatory Assistance

In addition to Practice Group Chair Andrew Stutzman, the group is comprised of partners Danielle Banks, Nicholas Deenis, Daniel Fitch, Patrick Kingsley, Jeffrey Lutsky, William Mahoney Jr. and Francis Manning; and associates Sean Adam, Eric Hurwitz and Heather Tashman.

For further information about the practice group and its capabilities, please contact Andrew Stutzman at 215.564.8008, or by e-mail at astutzman@stradley.com.

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Banking Alert, December 2006
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