No, a document – not a Draft!


Following the first Technical Meeting in the ICC Banking Commission held in Rome November 2016 the new Final ICC Opinions have been circulated.

One of the ICC Opinions has been subject to quite some discussion in the Trade Finance forums on the internet; namely TA.853rev.

In fact the issue – or rather issues – covered by this Opinion is somewhat trivial:


The LC in question includes the requirement that “all documents to show contract number and date”, and questions if:

* A Courier receipt must show contract number and date?

* A Draft must show contract number and date?


Nevertheless the latter issue has – as said – been the subject for quite some discussion. It seems to be the sentence “a draft is an unconditional order in writing and not a document” that is the trigger. Let me re-cap the position of the ICC Opinion:


In the Analysis the following is stated:

“If the contract number and date were also to appear on the draft, this should have been specifically stated in field 47A as, ‘All drafts and documents to show contract number and date.’ Although this query relates to a credit transmitted by SWIFT message, the same principle would apply to a credit issued via any transmission method.”


This position if further emphasised in the conclusion as follows:

“The term ‘All documents’ does not include a draft. A draft is an unconditional order in writing and not a document.”


In other words: Although the LC called for “all documents to show contract number and date” the fact that this data is not stated on the Draft is not considered a discrepancy under the UCP 600.


My personal explanation of this position is that:

The statement “a draft is an unconditional order in writing and not a document” is not to be regarded as an attempt to make a legal definition of a Draft and/or a legal distinction between a Draft and documents.

It is however a statement that aims to position Drafts versus documents for the purpose of the examination of the documents presented under an LC subject to the UCP 600. In that respect, please note the following:


1: The statement “an unconditional order in writing and not a document” is a commonly accepted definition of a Draft/Bill of Exchange. Se for example:

http://www.businessdictionary.com/definition/bill-of-exchange-BOE.html

 

2: UCP 600 article 2 includes the following definition of Negotiation:

“Negotiation means the purchase by the nominated bank of drafts (drawn on a bank other than the nominated bank) and/or documents under a complying presentation, by advancing or agreeing to advance funds to the beneficiary on or before the banking day on which reimbursement is due to the nominated bank.”

It is clear from this definition that the UCP 600 actually does make a distinction between drafts and documents in that it says “drafts [..] and/or documents”.

 

3: Section B (paragraphs B1 through B18) in ISBP 745 deals with “Drafts and calculation of maturity date”. Paragraph B1 includes the following statement:

“Banks only examine a draft to the extent described in paragraphs B2-B17”

Paragraphs B2-B17 covers the following areas:

* The tenor
* The maturity date
* Banking days
* Grace days
* Delays in remittance
* Drawing
* Signing
* Amounts
* Endorsements
* Correction and alteration

I.e. only the data that is specifically relevant for a Draft.

 

4: Official ICC Opinion TA.703rev deals with a similar situation, i.e. a LC requirement to the effect that:

“ALL DOCUMENTS MUST BE PRESENTED IN ENGLISH, IF ANY DOCUMENT PRESENTED IS NOT IN ENGLISH WE SHALL FORWARD THE PRESENTATION TO ISSUING BANK ON APPROVAL BASIS.”

The analysis includes the following wording:  

“For the purposes of a clause such as “all documents must be issued in English”, a draft is not to be considered as one of those required documents unless the credit requires the presentation of a draft drawn on the applicant under “documents required”.”

I.e. the conclusion of TA.703rev is the same as found in TA.853rev

 

Following the above it is necessary to make a clear distinction between Drafts and documents: There simply must be a different “standard” for examining the documents presented (such as invoice, bill of lading and packing list) comparted to a Draft. This is clear both from the new ICC Opinion (I mean; locally the contract number has no place on a draft!), but also from the UCP 600 provisions and ISBP 745 practices quoted above.

This distinction is now clearly made by ICC Opinion TA.853rev, and it is my humble hope that this ICC Opinion will help the industry; especially by reducing refusals based on Drafts.

Bear in mind that it still is very important to take care of yourselves and the LC!

Kind regards

Kim

 




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  • Kim Sindberg on 2016-11-21 02:12am
    MARTIN: If draft is stated in field 46A is it still considered a draft or as part of the documents? SURESH: Kim, if draft is not stated in 46a,but the LC show drawee, and if LC is available by acceptance, the draft needs to be presented, right?. However if the the same LC is available by negotiation, and LC show drawee field, and the draft is NOT presented, will you consider the presentation discrepant?, I think yes it will be discrepant, Pl reply KIM: Ahh the ”what if” game ☺ Before TRYING to answer these questions, let me look at it from another angle: If the Draft is called for in SWIFT field 46A (Documents Required) I would consider this bad banking practice. I would simply get confused as to the intention of the issuing bank, and “fear” that requirements such as “All documents to show contract number and date” were to be stated on the Draft. Consequently I would revert to the issuing bank for clarification. ICC Opinion TA.853rev covers only the specific scenario outlined there, and – as far as I know – there is not documented practice for the situation where a Draft is called for in SWIFT field 46A. Until we have that I would 1) ask clarification from the issuing bank 2) if such is not given I would treat the Draft the same way as the commercial documents. And Suresh; I am not sure I follow you 100% I am afraid. But I agree (as I think you say) that it basically depends on who the drawee is! For example: When the LC is available by negotiation with a nominated bank or any bank, the draft should be drawn on a bank other than the nominated bank – often the issuing bank. In such case the Draft should be part of the presentation to the issuing bank, and it not – that would be a discrepancy. However, when the LC is available by acceptance with a nominated/confirming bank the Draft should be drawn on that nominated/confirming bank – and presented to the nominated/confirming bank (of course subject to the relevant ISBP paragraphs). In such case there would be no point in the nominated/confirming bank forwarding that Draft to the Issuing bank. . Or saying it another way: 1) Make sure the LC is clear and unambiguous and 2) ONLY call for Drafts when there is a specific need for that! There is no requirement in the UCP 600 that a Draft must be called for.

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