Documentary credits
8.1 Basic principles of documentary credits
8.1.2 Summary of UCP 600
Article 1
Article 1 outlines the application of UCP, stating that the rules are binding on all parties unless expressly modified or excluded by the credit.
Article 2
Article 2 gives the definitions of terminology used throughout the rules. In addition to the definitions of the parties involved, which are outlined above, the following terms are defined:
u ‘Banking day’ is the day on which a bank is regularly open at the place at which an act subject to UCP 600 is to be performed.
u ‘Complying presentation’ is a presentation of documents that is in accordance with the terms and conditions of the credit, the applicable provisions of UCP 600 and international standard banking practice.
u ‘Confirmation’ is a definite undertaking of the confirming bank to honour or negotiate a complying presentation. Note that this undertaking is in addition to the undertaking given by the issuing bank.
u ‘Credit’ is any irrevocable arrangement, however named or described, that is irrevocable and thereby constitutes a definite undertaking of the issuing bank to honour a complying presentation.
u ‘Honour’ can mean:
− to pay at sight − where the credit is available by sight payment;
− to incur a deferred payment undertaking and pay at maturity, if the credit is available by deferred payment;
− to accept a bill of exchange (‘draft’) drawn by the beneficiary and to pay at maturity if the credit is available by acceptance.
u ‘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.
Basic principles of documentary credits
u ‘Presentation’ means either the delivery of documents under a credit to the issuing bank or nominated bank or the documents so delivered.
u ‘Presenter’ means a beneficiary, bank or other party that makes a presentation.
Article 3
Article 3 gives a list of interpretations, including that all documentary credits are irrevocable, the manner in which documents may be signed, how the act of legalisation or certification may be evidenced on documents, the use of terms in a credit to describe the issuers of documents, what is understood by terms such as ‘promptly’, ‘immediately’, etc, the meaning of terms such as ‘from’, ‘to’, ‘until’, ‘after’, etc, and terminology used to describe certain parts of a month.
Article 4
Article 4 makes the distinction between a credit and the contract. Sub-article 4 (a) states:
A credit by its nature is a separate transaction from the sale or other contract on which it may be based. Banks are in no way concerned with or bound by such contract, even if any reference whatsoever to it is included in the credit. Consequently, the undertaking of a bank to honour, to negotiate, or to fulfil any other obligation under the credit is not subject to claims or defences by the applicant resulting from its relationship with the issuing bank or the beneficiary.
In addition, this article gives a recommendation discouraging issuing banks from including the underlying contract as an integral part of the documentary credit.
Article 5
Article 5 makes the distinction between documents versus goods, services or performance. This is an extremely important feature of a documentary credit, and an applicant must be aware that the banks only deal in documents and not the underlying goods, service or performance. In the event that a beneficiary ships the wrong or substandard goods, the applicant must still reimburse the issuing bank if a complying presentation has been made.
Article 6
Article 6 details the requirements concerning availability, the need for an expiry date and the place for presentation.
Article 7
Article 7 covers the issuing bank’s undertaking, which can be summarised as follows: the issuing bank undertakes to honour a presentation made to it by the beneficiary, provided the documents comply with the credit. A credit may allow a beneficiary to submit a presentation to a named nominated bank or any bank, as specified in the credit. If a complying presentation is received from a nominated bank, the issuing bank must reimburse that bank, provided that the issuing bank is itself satisfied that the terms of its credit have been met.
Article 8
Article 8 looks at the undertaking of the confirming bank. The confirming bank gives a similar undertaking to the beneficiary as that of the issuing bank. It will undertake to honour or negotiate a complying presentation that is made to it or to another nominated bank. The issuing bank is obligated to reimburse the confirming bank for any honour or negotiation that it effects, provided that the documents conform to the terms of the credit.
Article 9
Article 9 gives details on the advising of credits and any subsequent amendments. An advising bank is under no obligation to advise a credit or amendment to the beneficiary. If it agrees to do so, it is required to satisfy itself with the apparent authenticity of the credit or an amendment, or to advise the beneficiary that it has been unable to complete this task.
Article 10
Article 10 covers amendment in more detail. As a documentary credit is irrevocable, any amendment is subject to the consent of the issuing bank, the beneficiary and a confirming bank (if a confirming bank is involved in the transaction). However, once the parties to the credit have agreed to an amendment, the amendment will become an integral part of the credit and the beneficiary must comply with the original credit and the accepted amendment.
Article 11
Article 11 states that an authenticated teletransmission of a documentary credit or amendment will be deemed to be the operative credit or amendment. A pre-advice will only be sent if the issuing bank is fully prepared to issue the operative credit or amendment.
Article 12
Article 12 declares that a nominated bank is not obliged to honour or negotiate, unless it is also the confirming bank or it has expressly communicated to the beneficiary its agreement to honour or negotiate. When
Basic principles of documentary credits
an issuing bank issues a credit that is available by acceptance or deferred payment, it is an implied authorisation for the nominated bank to prepay or purchase the draft accepted by it or the deferred payment undertaking incurred by it.
Article 13
Article 13 examines fairly basic bank-to-bank reimbursements arrangements.
Banks should utilise the more extensive rules that exist in the ICC’s Uniform Rules for Bank-to-Bank Reimbursements Under Documentary Credits (publication no. 725) (ICC, 2008).
Article 14
Article 14 gives a number of standards relating to the examination of documents (see also section 8.1.3 below). Banks have a duty to examine documents, on the basis of the documents alone, to determine whether they appear on their face to constitute a complying presentation. This article gives banks a maximum of five banking days following the day of presentation to determine whether the presentation does comply.
Article 15
Article 15 reminds banks that once a presentation is determined to be complying, they must honour or negotiate. In the case of the confirming bank or nominated bank, they must also forward the documents as required by the documentary credit.
Article 16
Article 16 looks at the scenario when discrepant documents are presented.
In this instance, the nominated, confirming or issuing bank may refuse to honour or negotiate; however, it must notify the presenter by the close of the fifth banking day following the day of presentation, giving details of the discrepancies and indicating one of four statuses for the documents:
a. that the bank is holding the documents pending further instructions from the presenter; or
b. that the issuing bank is holding the documents until it receives a waiver from the applicant and agrees to accept it, or receives further instructions from the presenter prior to agreeing to accept a waiver; or
c. that the bank is returning the documents; or
d. that the bank is acting in accordance with instructions previously received from the presenter.
Article 17
Article 17 states that at least one original of each stipulated document must be presented. A bank may treat a document as an original if it bears an apparently original signature, mark, stamp or label of the issuer unless the document states that it is not an original.
Article 18
Article 18 requires that the commercial invoice must appear to have been issued by the beneficiary (except as required in Article 38 − see below), must be made out to the applicant and must be in the same currency as the credit. It need not be signed. The invoice must contain a description of the goods, services or performance that corresponds with that in the credit.
Article 19
Article 19 establishes that when a transport document covers at least two different modes of transport, the document must, among other conditions:
u appear to indicate the name of the carrier and be signed by the carrier or its named agent, or the master or its named agent;
u indicate that goods have been despatched, taken in charge or shipped on board at the place stated in the credit;
u indicate the place of despatch, taking in charge or shipment and the place of final destination stated in the credit;
u be the sole original or, if issued in more than one original, be the full set of originals as indicated on the transport document;
u contain all conditions of carriage or make reference to another source containing the full terms and conditions of carriage;
u contain no indication that it is subject to a charter party.
Article 20
Article 20 states that a bill of lading must, among other conditions:
u appear to indicate the name of the carrier and be signed by the carrier or its named agent, or the master or its named agent;
u indicate that goods have been shipped on board a named vessel at the port of loading;
u indicate the port of loading and discharge as stated in the credit;
u be the sole original or, if issued in more than one original, be the full set of originals as indicated on the bill of lading;
Basic principles of documentary credits
u contain all conditions of carriage or make reference to another source containing the full terms and conditions of carriage;
u contain no indication that it is subject to a charter party.
Article 21
Article 21 covers non-negotiable sea waybills, the requirements of which are similar to those detailed for bills of lading.
Article 22
Article 22 states that a charter party bill of lading must, among other conditions:
u contain an indication that it is subject to a charter party;
u appear to be signed by the master or its named agent, the owner or its named agent, or the charterer or its named agent;
u indicate that goods have been shipped on board a named vessel at the port of loading;
u indicate the port of loading and discharge as stated in the credit;
u be the sole original or, if issued in more than one original, be the full set of originals as indicated on the charter party bill of lading;
Banks will not examine charter party contracts.
Article 23
Article 23 states, among other conditions, that air transport documents must appear to indicate the name of the carrier and be signed by the carrier or its named agent. In addition, they must state a date of issuance and indicate the airport of departure and destination as stated in the credit.
Article 24
Article 24 states, among other conditions, that road, rail or inland waterway transport documents must appear to indicate the name of the carrier and be signed by the carrier or its named agent, or indicate receipt of the goods by either a signature, stamp or notation. In addition, they must indicate the place of shipment and place of destination as stated in the credit.
Article 25
Article 25 establishes, among other conditions, that courier and postal receipts must both be stamped or signed at the place from which the credit states the goods are to be shipped.
Article 26
Article 26 requires that transport documents must not indicate that the goods are or will be loaded on deck. However, a clause on a transport document stating that the goods may be loaded on deck is acceptable.
Article 27
Article 27 states that a bank will only accept a clean transport document, ie one that bears no clause or notation that expressly declares a defective condition of the goods or their packaging.
Article 28
Article 28 examines insurance documents and coverage. Important features include that the date of the insurance document must be no later than the date of shipment or the document must indicate that cover was effective no later than the date of shipment. It must indicate the amount of insurance coverage in the same currency as the credit. Cover notes will not be acceptable unless required by the credit. The minimum insurance coverage is 110% of the CIF or CIP value of the goods (see Chapter 5 for explanation of these Incoterms).
Article 29
Article 29 permits the expiry date or last date for presentation to be extended when that date falls on a non-banking day, except due to a ‘force majeure’ event. If the latest shipment date falls on a non-banking day, it is not extended.
Article 30
Article 30 states that the words ‘about’ or ‘approximately’ when used in the credit in connection with the amount, quantity of goods or unit price can be construed as allowing a tolerance of not more than 10 per cent more or less. In the event that the goods are described by weight or volume, then a plus or minus 5 per cent tolerance in the quantity shipped is permissible, providing the amount of the credit is not exceeded.
Article 31
Article 31 covers partial drawings and shipments, which are allowed unless the credit states otherwise.
Article 32
Article 32 states that when a credit includes a schedule for instalment drawings or shipments within given periods (ie a start date and an end date), a failure to ship or present under one of the dates or instalments will render the credit unavailable for that and any subsequent instalment.
Basic principles of documentary credits
Article 33
Article 33 states that a bank has no obligation to accept a presentation outside its banking hours.
Articles 34 and 35
Articles 34 and 35 cover disclaimers on effectiveness of documents and on transmission and translation, limiting the bank’s liability or responsibility.
Loss of documents in transit is also covered and offers some protection to a beneficiary where a nominated bank has previously examined the documents and determined that they comply, whether or not the nominated bank has honoured or negotiated.
Article 36
Article 36 covers the event of ‘force majeure’, which comes from the French definition meaning ‘superior force’. It simply means that the banks involved with the credit assume no liability or responsibility for any consequences arising out of any interruption in business caused by acts of God, riots, civil commotions, insurrections, wars and acts of terrorism, or by any labour strikes.
Article 37
Article 37 makes it clear that the issuing bank is not liable should the advising bank not carry out its instructions, even if the issuing bank selected the bank. The applicant remains ultimately liable for any charges that cannot be collected from a beneficiary.
Article 38
Article 38 outlines the rules relating to a transferable credit (which are detailed fully in section 8.4.1 below). Important features of this article are that only certain parts of the transferable credit can be amended by the first beneficiary, namely:
u amount of the credit;
u unit price;
u expiry date;
u period for presentation;
u latest date for shipment;
u percentage of insurance cover;
u the name of the first beneficiary, which may be substituted for that of the applicant in the transferred credit.
Note that, of these, the first five listed above may be reduced or curtailed. A bank that is nominated to transfer a credit is under no obligation to do so.
Article 39
Article 39 looks at assignment of proceeds of a documentary credit. Even if a credit is not designated as transferable, it does not affect the right of a beneficiary to assign the proceeds under the credit. This article relates only to the assignment of the proceeds under the credit and not the assignment of the right to perform under the credit.
Visit the ICC website (www.iccwbo.org [Accessed: 6 March 2014]) to read more about UCP 600.