ICC’s Art of Making UCP vs. International Art of Making International Rules Open-Door vs. Closed-Door Policy

Private vis-à-vis public law

Commercial rules that affect trade finance specialists may be adopted at two levels: the governmental level and at the private – often industry sponsored – level. Both of these levels are intertwined and interact with each other. For instance, when legal rules or collections of best practices are adopted at the governmental level, “private” implementation is customarily necessary. Without carriers and other transport industry people, the Hague Rules would become an obsolete instrument. At the same time, when commercial and trade-related transactions are exercised in practice, they need institutional support. In this way, the National Bank of Mexico issued a circular that formally recognized the ISP98 and standby letters of credit.[i] Thus, the Mexican banks have been officially blessed with authority to issue independent undertakings subject to ISP98.

As the volume of international trade and finance has increased, private institutions seek to influence the drafting of these rules at the governmental as well as other official levels. Many representatives of trade finance industry have various incentives and resources to effectively participate in the drafting process. To this end, the Basel Committee often requests input from the public and publishes all documents, including proposed rules and standards on its website. On the opposite side of the spectrum is the UCP revision process that is only quasi-public, since it limits the input solely to the member chambers of the ICC. As pointed out by Laurence Bacon, “there are no exporters or importers represented in the Drafting Group of UCP 600.”[ii] The lack of cross-representation from expert circles that belong to different ICC Commissions also seems to be the case in the drafting process of other ICC instruments. Prof. Ramberg remarked that bankers were not represented on the INCOTERMS 2000 drafting group. Furthermore, he noted that it would be a good idea if the cooperation of ICC Commissions were closer.[iii]

Drafts of the UCP 600 have not been made available on the ICC website for public comments. In contrast, the United Nations Commission on International Trade Law periodically posts all the working documents on the website. In this aspect, the publicity of the rule-making procedures differs, depending on the composition and authority of the legislative bodies. Public-law drafting (U.N. rules) seems to be more open to public discussion than private-law processes (ICC drafting styles).

Bottom-up and top-down approach

There are two basic styles of international rule-making. In literature they are commonly referred to as the bottom-up and the top-down approaches. In the traditional top-down process, representatives and nominees of governments draft rules, typically in the form of international treaties and conventions that regulate private relationships of the parties in the marketplace. Many important instruments originated from the top-down process. Among those, I am sure that many (if not all) bankers are familiar with the Hague, the Hague-Visby Rules, the Warsaw and the Montreal Conventions, or the Vienna Sales Convention. In contrast, the bottom-up process is driven by practitioners who draft rules to be later implemented in their daily operations. The obvious example is the drafting process of the ICC and its individual Commissions. This category of rules is represented by UCP, URDG, INCOTERMS and ISP98. Both approaches seek to achieve the common goals – harmonization of practices and rules, promote efficiency, increase legal certainty and reduce transaction costs.

The law making differs also with respect to the final shape and binding effect of the product. ICC compiles and publishes the best practices in specific industries (UCP, INCOTERMS, URDG, etc.) that are not legally binding unless expressly incorporated into the text of the LC.[iv] Other entities publish standard contract forms (ISDA Master Agreement) that are used by ISDA members in over-the-counter (OTC) derivative transactions. Similarly to the ICC rules, terms of standard contracts are not enforceable until agreed upon by the contracting parties, because none of these entities has been empowered to exercise formal rule-making authority.

The requirement for explicit incorporation of rules and choice of specific contract forms stands in contrast with public-law instruments that legally bind the parties. In the case of Vienna Sales Convention that is applicable to cross-border sale contracts, it automatically governs sale contracts with an international element (e.g., buyer and seller are located in two different countries), unless the parties expressly exclude its application and subject the contract to a chosen domestic law.[v] Accordingly, the will of the parties must be expressed, whether positively or negatively, with respect to both non-binding as well as binding sets of rules. Whereas in the former, the intent must clearly indicate that the parties wish to be bound by a set of best practices (UCP), in the latter their relationship will be governed by an international convention (Vienna Sales Convention), unless they exercise the opt-out option.

UNCITRAL and other international organizations

For a banker, a trade finance specialist or other individual from the private sector it may be interesting to compare the features of the drafting methods employed by governmental international organizations with those of the non-governmental enteritis. Some phases in the rule-making process are similar to the ICC drafting-style, whereas some differ. The United Nations established the United Nations Commission on International Trade Law (UNCITRAL) in 1966. Since its establishment, the agenda of UNCITRAL has focused on the harmonization and unification of cross-border transactions and relationships that are frequently encountered in international trade.

Other important players in the international private law making are the Hague Conference on Private International Law and the International Institute for the Unification of Private Law (“UNIDROIT”). UNIDROIT is not a legislative body, products of its drafting efforts become law only when they are properly ratified and implemented by national lawmaking authorities. The work of the Hague Conference on Private International Law is limited to choice-of-law issues.

UNCITRAL’s membership has been steadily expanded and the original count of twenty-nine states currently stands at 60.[vi] Membership of UNCITRAL and its various working groups is structured to ensure that the various geographic regions, cultures and major legal systems of the world are represented. UNCITRAL’s legislative work is organized at two levels. The first level is the UNCITRAL Commission, which holds annual plenary sessions in New York and Vienna. The last session was held in New York in June 2006. Customarily, discussions as to the substance of conventions, model laws and guides under the preparation of the UNCITRAL working groups are not conducted at the Commission sessions. The Commission evaluates progress of the working groups with their respective projects and Select^s topics for its future work. In contrast, the ICC Banking Commission sessions discuss various issues of substantive nature, ranging from drafts of UCP to approving BC Opinions. In this aspect, the Banking Commission meetings resemble the procedures at the second UNCITRAL level - the Working Groups.

It is the second level of UNCITRAL that does the substantive – rule-making – work. UNCITRAL is structured into a number of working groups, which undertake the substantive preparatory work on designated topics. Currently, there are six working groups (WG): WG I (Procurement), WG II (Arbitration), WG III (Transport Law), WG IV (Electronic Commerce), WG V (Insolvency), and WG VI (Security Interests). Each working group holds one or two sessions per year (one in Vienna and one in New York). Exceptionally, a third meeting may be held, if the members of a working group agree so. This was the situation in the Working Group VI on security interests that has already held two meetings this year and yet another meeting is scheduled for December 2006. The meetings of working groups are formal and usually last one week. In contrast, the UCP Drafting Group is more limited in membership and meets more frequently. Its drafting meetings are much more flexible than the UNCITRAL official sessions.

Similarly to the ICC Banking Commission meetings, documentation for UNCITRAL meetings is prepared by the UNCITRAL Secretariat. The documentation is made available to participants in all six official languages of the United Nations. UNCITRAL Commission and working group sessions are simultaneously interpreted in all six official languages.

In addition to its member states, UNCITRAL also invites observers from other countries, as well as international, regional and non-profit organizations. For instance, “non-governmental members” of the WG VI are the IMF, the World Bank, the European Commission, the American Bar Association, the Max Planck Institute and the National Law Center. In my understanding, there is no similar status of observers at the sessions of the UCP Drafting Group.

In Select^ing topics for its future work, UNCITRAL considers factors such as changing trends in commercial practice (secured transactions), special interests to developing countries (insolvency) or developments in technology (e-commerce). UNCITRAL covers more legal and practical ground than ICC. Agenda of both of these organizations sometimes overlaps, particularly in the area of payment and transportation laws (UCP v. the 1995 UN Convention on Standby LCs; ICC Rules on combined transport v. the Hamburg Rules). UNCITRAL has also adopted resolutions that recommend the use of INCOTERMS, UCP, ISP98 as well as the Uniform Rules for Contract Bonds.[vii]

transformation of ucp from soft to hard law

The basic choice with respect to the effects of legal rules is between what is called “hard law” and “soft law”. Hard law proposals are formulated so that, if implemented, the precise texts of the proposals become the law of the implementing government. Hard law rules sometimes allow implementing governments to make reservations or declarations as to specific provisions, but the objective is to formulate texts that will be basically identical among implementing nations. Soft law proposals are proposals set out in the form of a model law or legislative guide; so that each implementing nation or state is free to design its own statutory texts.[viii]

Soft law rules are not binding unless implemented by the governments or incorporated into private contracts. On its face, UCP may be classified as a soft law instrument. However, the vast majority of banks, exporters, carriers, forwarders as well as insurers identify the applicable law with the UCP. Broad representation of “industry people” and LC users creates a presumption of acceptability and binding nature of the rules in daily practice. Functionally, UCP attained the status of hard law that is respected not only by practitioners, but also by courts.[ix] The Banking Commission itself frequently assumes “an interpretive, quasi-judicial posture, issuing opinions and policy statements.”[x] Its influence has transcended the boundaries of the banking community and entered the legal arena where in some cases the Banking Commission opinions turned out to be very influential in resolving LC related disputes. Besides, with the introduction of DOCDEX, the Banking Commission has transformed itself from the role of advisor and policy-maker to that of adjudicator.[xi]

REFERENCES

[i] See http://www.banxico.org.mx/dDisposiciones/Disposiciones2019/40-2000.html .

[ii] Laurence A.J. Bacon, Who speaks for the exporter? DCInsight Vol. 12 No. 3 July – September (2006).

[iii] Jan Ramberg, Professor Jan Ramberg Talks about the Provisions of INCOTERMS 2000 and Why Bankers Need to Know Them, DCInsight Vol. 5 No. 3 Summer (1999).

[iv] UCP 500, Art. 1.

[v] Vienna Sales Convention, Art. 6.

[vi] The last enlargement was agreed upon in 2002.

[vii] See http://www.uncitral.org/uncitral/en/other_organizations_texts.html .

[viii] Curtis R. Reitz, Globalization, International Legal Developments, and Uniform State Laws, 51 Loyola Law Review, 301 (2005).

[ix] Harold J. Berman & Colin Kaufman, The Law of International Commercial Transactions (Lex Mercatoria), 10 Harv. Int’l L.J. 221, 251 (1978).

[x] Janet Koven Levit, A Bottom-Up Approach to International Lawmaking: The Tale of Three Trade Finance Instruments, Yale Journal of International Law, p. 171 (2005).

[xi] Id.

AN INSIDE STORY
T. O. LEE’EXPERT COMMENTARY
 

• Why ICC has Closed-Door Policy?

• Why No Traders in Drafting Group?

• Why ICC has Mismatch between Policy and Practice?

  
  

  Basically I agree with Marek's observations on ICC rule making and would like to add my other observations as well.

  (1) Drafts of new rules (such as the UCP 600) are not open to the public

  As a member of the UCP 500 Revision Consulting Group, I often see notices from ICC warning us not to distribute the drafts to anyone else because the drafts are provided for my own private use only, to help me preparing my comments and nothing more. When requested by ICC to give my comments during the drafting stage of other ICC rules, such as ISBP 645, ISP98, eUCP etc. I received similar warnings from ICC. From my exchange of emails with ICC, I was told that ICC did worry that if the drafts were to be distributed freely to the public, some traders, freight forwarders and the like might not realize that they were only drafts and would treat them as new UCP provisions. This would create confusions in the market place.

  To avoid such confusions, in the drafting of UCP 600, I note that the later drafts are marked with a water mark "DRAFT" in super size fonts running diagonally from bottom left corner to top right corner across the pages.

  Now with the DRAFT watermarks on the drafts, ICC should have no worries in making the drafts available to the public for comments. However, to be fair with ICC, we have to look at the other side of the coin as well. Thousands and thousands of comments are flowing from the ICC National Committees on each draft and this is a very big burden for the members of the UCP 600 Drafting Group. That is the reason why ICC refuses comments from any individual and each individual must present his own comments to his National Committee that will consolidate the comments received before submission to the ICC. This is to avoid duplication and to lighten the work of the Drafting Group. Bear in mind that the work of the Drafting Group is voluntary and without pay. So we should consider this point as well.

  As a self-employed, despite being an "UCP activist", I cannot afford both the time and the expenses to travel to four corners of the globe six or more times a year, with each session lasting for one week or more. So the best I could do is to contribute my comments by fax in the past and by email at present. I was told by a former member of the UCP 600 Drafting Group that he had to quit because of the same reason. He is now a member of the UCP 500 Revision Consulting Group, a role that he is more comfortable with.

  (2) No observers from other trades in the UCP 600 Drafting Group

  In principle, I agree with the above comments from Marek, but in practice this may be difficult to achieve. I understand that the other ICC Commissions, such as for transport and cargo insurance, are not enthusiastic in giving comments to the drafts of the UCP. This was so in the drafting of UCP 500 from UCP 400. Hence even if the other ICC Commissions were invited to send observers to the UCP 600 Drafting Group, we might find empty seats in these meetings.

  I had already made similar suggestions in my article "Inconsistencies Among Terms Used in ICC Rules", published in Documentary Credits Insight, Volume 6, No. 4. The past Secretary General, Maria Cattuai had written me a letter expressing her concerns, thanks and encouragement, promising me that she would urge closer interaction and communications amongst the ICC Commissions. Since then the situation has improved somehow but not enough is being done. We now see representatives from other ICC Commissions present in the ICC Banking Commission meetings, such as Professor Charles Debattista.

  (3) ICC Practices contradictory to the objectives and nature of ICC

  The objectives of the ICC are to promote the UCP and other trade rules. ICC is also a non-profit making organization. However, I observe that some ICC practices are contradictory to the objectives of ICC and not matching the nature of ICC as a non-profit making organization.

  ICC claims to own the sole copyrights of all the trade rules, UCP 600 included. However, ICC seems to forget that the UCP 600 is enhanced by contributions from the "UCP activities", like me, who continue to give support through giving comments, opinions and by attending ICC Banking Commission meetings held each year at our own cost. Members of the UCP 500 Revision Drafting and Consulting Groups are also contributing to the drafting of UCP 600. But they are not allowed to use the UCP 600 in their own seminars, workshops or training courses. Those who help to cook the pizza, by providing the flour, eggs, tomatoes, olives, labor etc. are not allowed to touch the pizza, not to mention to share a slice. Is this fair and reasonable to them? However, other trade rules and international conventions, such as those from

  the United Nations, CISG etc. are free to be downloaded from the respective websites. Such practice fits the objective of the UN to promote the trade rules and conventions.

  ICC prohibits speakers to distribute the trade rules, UCP 600 included, in their seminars or training courses. If they wish their seminars or training courses to carry PDU (Professional Development Unit) for exemption in CDCS (Certified Documentary Credit Specialist) re-examination, they have to pay to ICC through IFSA USA or IFS UK a high fee of USD500 for each seminar or training course held in a year. That means if a speaker intends to do the same training course for six times in a year, he has to pay USD3, 000. Such practice is unreasonable. CDCS claims that the fees are cost for screening the contents of the training courses to make sure they comply with the standard required by ICC. If that is the case, then one screening is enough. Repetition should not be charged again for another USD500. Submission of contents must also be made a couple of months ahead. This makes life more difficult for the in-house workshops as their contents are often changed from time to time before the presentation. It appears that ICC is discouraging the promotion of the UCP. Some speakers regard this as ICC seeing them as competitors other than supporters.

  Such unreasonable practices may lead us to think that ICC is using them as barriers to stop competition in the market place.