Over the years, the ICC Banking Commission has become the leading global authority in the development of rules for the banking industry. Not only does it create universally recognized rules and guidelines for international banking practices, but it also conducts advanced research and analysis.
Today, most modern documentary letters of credit are issued in accordance with the Uniform Customs and Practice for Documentary Credits (UCP) 2007 revision, developed by the International Chamber of Commerce (ICC), widely known as UCP 600.
In this article, we will explain some of the rules and guidelines contained in UCP 600, as well as related terminology, to give you a clearer understanding of how a documentary letter of credit should be structured. Think of this as a glossary of relevant terms and jargon.
Involved Parties
It is necessary to know the parties involved in documentary letter of credit transactions, a brief description of which is provided below: (UCP 600 Article 2 Definitions)
Advising Bank means the bank that advises the letter of credit at the request of the issuing bank.
Applicant means the party on whose request the letter of credit is issued.
Beneficiary means the party in whose favor the letter of credit is issued.
Confirming Bank means the bank that adds its confirmation to the letter of credit at the request or on the instructions of the issuing bank.
Issuing Bank means the bank that issues the letter of credit at the request of the applicant or on its own behalf.
Negotiating Bank means the bank that is authorized to make payment under the letter of credit, or any bank, in the case that payment under the letter of credit is made by any bank.
Addresses
Subparagraph (j) of Article 14 of the UCP 600 states that when the addresses of the beneficiary and the applicant are indicated in any required document, they may not coincide with the addresses indicated in the documentary credit or any other required document, but must be located within the same country as the corresponding addresses indicated in the documentary credit. It is further clarified that contact details regarding the addresses of the beneficiary and the applicant may not be taken into account, including email, telephone, and/or fax.
Amendments
A letter of credit cannot be amended or canceled without the consent of the issuing bank, the confirming bank, if any, and the beneficiary (UCP 600 Article 10).
Independence
A documentary credit has its own terms which are independent of the terms or performance of the underlying sales contract. This is the principle of independence, according to which the documentary credit is considered an independent transaction. The independence of a documentary credit has been repeatedly confirmed in legislation over many years.
Essentially, this means that a documentary credit is regarded as a primary means of payment (as opposed to a guarantee on demand or a standby letter of credit, which are secondary means of payment).
Clean Transport Document
It is usually stated in documentary credits that the presented transport document must be “clean.” Article 27 of UCP 600 states that banks accept only clean transport documents, and that such a document is one in which there is no indication of defective condition of the goods or packaging. It is further clarified that the word “clean” need not necessarily appear on the document.
According to ISBP 745, the transport document should not include any statements directly indicating the defective condition of the goods or their packaging.
Proper Presentation of Documents
Proper presentation means the presentation of documents that comply with the terms of the credit, the applicable provisions of UCP 600, and international standard banking practice. This concept is elaborated in more detail in Article 15 of UCP 600.
As stated in ISBP 745 (Preliminary Considerations (iv)), the applicant and the beneficiary should carefully consider and agree upon the documents required for presentation, who should issue them, the content of these documents, and the deadlines by which they must be presented. The credit should require only those documents that are necessary (e.g., for customs clearance purposes). Where possible, it is recommended to limit document requirements to the invoice and the transport document.
eUCP
eUCP came into force on March 31, 2002. The revised version of eUCP (Version 2) came into effect on July 1, 2019. The principles on which eUCP was based are the principles underlying the UCP and the current standard practice for electronic commerce operations. eUCP focuses on the principles of electronic issuance and relies on the practice of paper operations in functionally equivalent situations for electronic presentations.
Installment
Article 32 of UCP 600 states that if a credit provides for partial shipments or deliveries in installments during specified periods, and any portion of the amount is not utilized or the goods are not shipped within the permitted period for that portion, then the credit cannot be used for that or any subsequent portion.
ISBP 745
The ICC Banking Commission first approved the International Standard Banking Practice (ISBP) in 2002 under the title ISBP 645. Subsequently, in 2007, ISBP 681 was issued to align it with UCP 600. The approval of ISBP 745 was given on April 17, 2013.
- It is important to note that ISBP does not make changes to UCP 600. It explains how the practice outlined in UCP 600 should be applied by documentary credit professionals.
- ISBP and UCP should be read as a whole, not separately. (ISBP 745 Preliminary Considerations i.)
- Incorporating ISBP into the terms of a documentary credit is considered unnecessary since the requirement to follow the agreed practice is implied in UCP 600.
- The publication reflects international standard banking practice for all parties to a documentary credit.
Letter of Credit or Documentary Credit (LC or DC)
Both terms are widely used and are synonyms. There is no difference between them, but since ICC rules refer to “documentary credits” (in particular, UCP 600 and ISBP 745), this guide uses that term.
Negotiation
Subparagraph (b) of Article 6 of UCP 600 emphasizes that the credit must state whether it is provided by sight payment, deferred payment, acceptance, or negotiation. All three terms can be found in Article 2 Definitions of UCP 600.
Negotiation means the purchase by the negotiating bank of bills of exchange (drawn on a bank other than the negotiating bank) and/or documents under the relevant presentation, by advancing or agreeing to advance funds to the beneficiary on a banking day or before which reimbursement must be made to the negotiating bank. It is important to note that mere examination of the documents does not constitute “negotiation.”
Pre-Advice
Currently, very few credits are provided with a pre-advice. Article 11 of UCP 600 “Telecommunication-Transmitted and Pre-Advised Credits and Amendments” is intended for a limited number of credits that consist of a pre-advice followed by postal or telecommunication confirmation.
Reasonable Time
Previous versions of the UCP provided banks with “reasonable time” to examine documents. In subparagraph (b) of Article 14 UCP 600, the reference to reasonable time is no longer mentioned, and the examination period is limited to a maximum of five banking days following the day of presentation of the documents.
According to the “UCP 600 Commentary” (ICC Publication No. 680), reference to a reasonable time was removed due to the lack of a standard application of this concept worldwide. However, this does not mean that the principle of reasonableness has completely disappeared. Banks must still be reasonable regarding the time spent examining documents. For example, five banking days to review a presentation consisting of a relatively small number of documents cannot be considered reasonable under current legislation.
Strict Compliance
On May 24, 2016, the ICC Banking Commission Executive Committee released a “Paper on the Issues” containing notes on the principle of strict compliance. As noted in the paper, the question of “strict compliance” frequently arose concerning the examination of documents presented under documentary credits. Accordingly, this paper was issued to present the Executive Committee’s position.
It was emphasized that the ISBP, especially the latest version ISBP 745, has significantly influenced the reduction of the strict compliance doctrine’s demands. In fact, one could argue whether strict compliance exists at all. A review of the “General Principles” section of ISBP 745 highlights numerous aspects of the document examination process that reduce the need for literal application.
UCP 600
Documentary credits are governed by an international set of practices developed by the International Chamber of Commerce known as the Uniform Customs and Practice for Documentary Credits (UCP). These rules were originally introduced to eliminate differences between national and regional rules on the practice of documentary credits.
They were first published in 1933 and have since been revised five times, the latest version being known as UCP 600. It consists of 39 articles that set out the requirements necessary for governing operations under documentary credits.
URR 725
This refers to the Uniform Rules for Reimbursement under Documentary Credits, Publication No. 725 (URR 725), which apply to any reimbursement between banks if the text of the reimbursement authorization expressly indicates that these rules apply.
The choice of the reimbursing bank is often a determining factor when the nominated bank decides on negotiation or negotiation. Banks asked to add confirmation often prefer that a reimbursing bank is specified in the documentary credit rather than relying on settlements being made directly by the issuing bank after the issuing bank has received appropriate documents.
P.S.
- There are many important regulatory restrictions and requirements, as well as business aspects, which are not covered in this article.
- None of the content contained here should be considered as providing legal or other professional advice for specific cases, and readers are responsible for obtaining such advice from their own lawyers or other professionals.
- You may also contact the specialists in our group (administration) for advice on these and other matters.