OPINION: [2009] J.I.B.L.R. 285

OPINIONThe Introduction of Article 12(b) in theUCP 600: Was it Really a Step
Forward?
Koji Takahashi∗

Bankers’ duties; Codes of practice; Documentary credits; Fraud;
Issuing banks; Letters of credit; Risk management

The 2007 revision of the Uniform Customs and Practice for DocumentaryCredits (the UCP 600) introduced a new provision in art.12(b), which
provides:‘‘By nominating a bank to accept a draft or incur a deferred payment
undertaking, an issuing bank authorizes that nominated bank to prepay orpurchase a draft accepted or a deferred payment undertaking incurred by that
nominated bank.’’∗ Professor of Law at the Doshisha

University Law School, Japan. I had thebenefit of presenting my thoughts at theannual conference of the Japanese
Academy for International BusinessTransactions (November 2, 2008 at theDoshisha University). I would like torecord my gratitude to the audience
members and especially Mr Hidenori
Hirano for their helpful comments.
Any errors are solely mine.
1 e.g. Michael Isaacs & Michael Barnett,‘‘International Trade Finance—Lettersof Credit, UCP 600 and Examination ofDocuments’’ 22 (12) (2007) J.I.B.L.R.
660, 661; Robert Parson, ‘‘UCP 600 A
New Lease of Life for Documentary
Credits? Part 2’’ 9–2 (2007) Financeand Credit Law 1; Ebenezer Adodo,‘‘The Legal Effect of Nomination under
the New UCP 600’’ 23 (4) (2008)
J.I.B.L.R. 231; Deborah Horowitz,‘‘Banco Santander and the UCP 600’’[2008] Journal of Business Law 508;
Hidenori Hirano, ‘‘The risk allocationof fraud in deferred payment credit
transactions’’ [2005] Annual of theAcademy for International BusinessTransactions (forthcoming) (inJapanese). cf. For critical views, see,e.g. Janet Ulph, ‘‘The UCP 600:
Documentary Credits in the 21stCentury’’ [2007] Journal of Business
Law 355, 374; Kazutaka Fujita, ‘‘The
legal status of a prepaying bank under
the deferred payment credit’’ 31 (2007)
Journal of Osaka University of Arts
Junior College 129 (in Japanese).
2Banco Santander SA v Bayfern Ltd[2000] 1 All E.R. (Comm) 776 CA. For asummary of the facts and decision, seeEbenezer Adodo, ‘‘The Legal Effect ofNomination under the New UCP 600’’
23 (4) (2008) J.I.B.L.R. 231 at [234].

This provision is designed to apply in the situation where the nominatedbank which has incurred a deferred payment undertaking discounts its
obligation before maturity and subsequently a fraud by the beneficiary isuncovered. As it explicitly authorises the nominated bank to prepay adeferred payment undertaking, the effect is that the issuing bank is notrelieved of its obligation to reimburse the nominated bank even if the fraud
comes to light before maturity.
This provision has been widely welcomed as facilitating trade financefor the beneficiary who wishes to shore up its cash by obtaining adiscounted payment of credit.1 This article, however, casts doubt whether
the introduction of art.12(b) should be seen as a step in the right direction.
The reason is that, as detailed below, it has effectively eliminated a useful
option of risk allocation.
Prior to the introduction of art.12(b) by the UCP 600, the issuingbank could assert a fraud by the beneficiary as a defence to a claim forreimbursement by the nominated bank where the latter has discounted its
obligation under a deferred payment undertaking without the knowledgeof the fraud. This is because the nominated bank under a deferred payment
credit, by definition, has the issuing bank’s authority to incur a deferredpayment undertaking and to pay at maturity but, without a further explicit
authorisation as conferred under art.12(b) of the UCP 600, it does nothave a requisite mandate to pay before maturity. The well-known decisionof the English Court of Appeal in Banco Santander SA v Bayfern Ltd2
confirmed this point under the UCP 600 and it is submitted that thedecision accords with legal logic.3 The soundness of its reasoning is attestedby the fact that in other countries, too, judgments had been renderedon the same basis, such as the Singaporean decision of Credit Agricole
Indosuez v Banque Nationale de Paris4 and the South African decision of
Vereins-und Westbank AG v Veren Investments.5 This legal position is notharsh on the nominated bank because it is under no obligation to makeprepayment even if it has added confirmation to the credit and because it
can determine the rate of discount commensurate with the risk of fraud.
Furthermore, a deferred payment credit allows the issuing bank time toinvestigate any possibility of fraud on the part of the beneficiary since
there is often a substantial interval between the time for the presentation ofdocuments and maturity.6 On the other hand, in the case of a negotiationcredit, since the nominated bank is authorised to negotiate, i.e. purchase[2009] J.I.B.L.R., ISSUE 6  2009 THOMSON REUTERS (LEGAL) LIMITED AND CONTRIBUTORS

286 OPINION: [2009] J.I.B.L.R.

3 Commentaries making similarly
positive appraisals include, e.g. DanielAharoni & Adam Johnson ‘‘Fraud andDiscounted Deferred Payment
Documentary Credits: The Banco
Santander’’ 15 (2000) J.I.B.L.R. 22, 25;‘‘Presenters Immune from the Fraud
Rule in the Law of Letters ofCredit’’[2002] Lloyd’s Maritime &Commercial Law Quarterly 10, 20; EyalBerger, ‘‘Putting Florida Buyers on parwith International Buyers: A
Cost-Benefit Analysis of Revising
Florida Statute’’ 675.109(1)(A)(4)’’ 16(2004) Fla. J. Int’l L. 529.
4 Credit Agricole Indosuez v BanqueNationale de Paris [2001] 2 S.L.R. 1.
5 Vereins-und Westbank AG v Veren
Investments 2000 (4) S.A. 238. EyalBerger, ‘‘Putting Florida Buyers on parwith International Buyers: A
Cost-Benefit Analysis of Revising
Florida Statute’’ 675.109(1)(A)(4)’’ 16(2004) Fla. J. Int’l L. 529 at [535], saysthat the judgment to the same effectwere rendered in France, Germany,
Switzerland and Israel, though it relies
on a somewhat dated material, A.
Moher, ‘‘Discounting of Deferred
Payment Credits—Comparative
Aspects’’ 10 (1983) Banking & Fin. L.
Rev. 379, 388.
6 As noted by Adodo Ebenezer Adodo,‘‘The Legal Effect of Nomination underthe New UCP 600’’ 23 (4) (2008)
J.I.B.L.R. 231 at [232], 390 days fromthe date of bills of lading inCzarnikow-Rionda Sugar Trading Inc v
Standard Bank London Ltd [1999] 1 All
E.R. (Comm) 890, [1999] 2 Lloyd’s Rep.
187; 360 days in Vereins-und Westbank
AG v Veren Investments 2000 (4) S.A.
238; 180 days from the date ofpresentation of the specified
documents in Credit Agricole Indosuezv Banque Nationale de Paris [2001] 2S.L.R. 1; 180 days from the date of billsof lading in Banco Santander SA v
Bayfern Ltd [2000] 1 All E.R. (Comm)
776 CA.
7 See European Asian Bank AG v
Punjab & Sind Bank (No.2) [1983] 1
W.L.R. 642 CA.
8 In Credit Agricole Indosuez v BanqueNationale de Paris [2001] 2 S.L.R. 1,
the Singapore Court of Appeal
considered whether the letter of credit
at issue was a deferred payment credit
or a negotiation credit on theassumption that the 2 types of credit
differ in this respect.
9 Commentary on UCP 600 (ICCPublication No.680) p.54.
10A credit must state whether it isavailable by sight payment, deferredpayment, acceptance or negotiation:art.6(b) of the UCP 600.

drafts and/or documents on or before reimbursement from the issuingbank is due, the issuing bank cannot assert a fraud by the beneficiary
which has been revealed after the nominated bank purchased a complying
presentation.7
It follows that prior to the introduction of art.12(b), the risk of fraud could
be allocated between, on the one hand, the issuing bank or ultimately theapplicant and, on the other, the nominated bank by choosing between thenegotiation credit and the deferred payment credit.8 Thus, if an applicant
has a good knowledge of its customer qua the beneficiary, it may not be
reluctant to embrace the risk of fraud on the part of the latter. In such cases,
a negotiation credit could be chosen. In other cases, the beneficiary which
has a proven record of integrity with its banks may be confident that it
could arrange for a discount of credit. In such cases, a deferred payment
credit could be chosen.
This distinction between the two types of credit has been removed by
the introduction of art.12(b) by the UCP 600,9 with the result that therisk of fraud now lies with the issuing bank or ultimately the applicant,regardless of which basic type of credit is used, be it the sight payment
credit, acceptance credit, negotiation credit or deferred payment credit.10
Consequently, if the issuing bank or the applicant is to avoid the risk offraud, it would be necessary11 to insert in their letter of credit a clauseexcluding the application of art.12(b).12 It would be safe to say generallythat as between a rule which makes a useful option readily available anda rule which has to be excluded in order to make room for a useful option,
the former is superior for its better usability. In the present context, theexclusion of art.12(b) would not only be cumbersome but also difficultin practice. The reason is that under the underlying contract with theapplicant, unless there is any special agreement, the applicant would beobliged to procure a letter of credit on usual terms. A credit excluding
provisions of the UCP may not be regarded as such. Nor would it beeasy to obtain the beneficiary’s agreement to exclude art.12(b) since thepurpose of such exclusion is none other than the avoidance of the riskof fraud by the beneficiary, a point the applicant would not wish toraise to the beneficiary when it is negotiating to conclude an underlying
deal.
Without the means of avoiding the risk of fraud, the issuing bank
may refuse to issue a letter of credit for fear of not being able to obtainreimbursement from the applicant. Short of it, it may make itself less averseto the risk of fraud by requiring itself to be put in funds in advance or byraising the commissions it charges on the applicant. If the applicant thenfinds that the transaction would not be worth the risk and cost of fraud
it is exposed to, it may give up trading with the beneficiary. Thus, thelack of effective option of shifting the risk of fraud to the nominated bank,brought about by the introduction of art.12(b), could hinder the financingof trade.
It must be acknowledged that the choice between the deferred payment
credit and the negotiation credit on the basis outlined above had not been
the routine market practice. The Banco Santander ruling was indeed said
to have driven a coach and horse through what had hitherto been theprevailing understanding of the risk allocation.13 In response to the rulingsof Banco Santander and other similar cases, there were commentaries
calling on the banks to change their perception of risk in discounting adeferred payment obligation.14 Those rulings should therefore have raised
awareness that a choice could be made between the two types of credits
in accordance with the preferred apportionment of the risk of fraud.
However, the trade financing circles missed the opportunity of establishinga new market practice along that line. Pressed under their pressure, thedrafters of the UCP 600 sought to appease them by repudiating thoserulings with the new art.12(b). It has produced the undesirable result ofeffectively removing a useful option of risk apportionment. In general,
where there is a gap between the practice and the rules, it is not possible
to say categorically whether the correct approach is to change the rules to[2009] J.I.B.L.R., ISSUE 6  2009 THOMSON REUTERS (LEGAL) LIMITED AND CONTRIBUTORSOPINION: [2009] J.I.B.L.R. 287

11 Requiring the tender of certain
documents such as a quality certificate
issued by a reputable institution would
go some way towards protecting against
frauds but is not a cure-all solution in
the face of a determined fraudster.

reflect the practice or to wait for the practice to be brought in line withthe rules. As the full title of the UCP, ‘‘Uniform Customs and Practicefor Documentary Credits,’’ implies, it should usually be the rules whichshould be adjusted to the practice. However, in the present context, it must
be doubted whether the introduction of art.12(b) was a step in the right
direction.

12 See art.1(2) of the UCP 600.
13 Robert Parson, ‘‘UCP 600 A New
Lease of Life for Documentary Credits?
Part 1’’ 9–1 (2007) Finance and Credit
Law 1, 3.
14 In relation to Banco Santander SA v
Bayfern Ltd [2000] 1 All E.R. (Comm)
776 CA, see Daniel Aharoni & Adam
Johnson ‘‘Fraud and Discounted
Deferred Payment DocumentaryCredits: The Banco Santander’’ 15(2000) J.I.B.L.R. 22 at [25]; in relation toCredit Agricole Indosuez v BanqueNationale de Paris [2001] 2 S.L.R. 1,
see Soh Chee Seng, ‘‘Deferred Payment
LCs Re-Visited’’ (May 2001)
Documentary Credit World 29 (thoughdisapproving the decision itself).

[2009] J.I.B.L.R., ISSUE 6  2009 THOMSON REUTERS (LEGAL) LIMITED AND CONTRIBUTORS